10 Ways Businesses Unknowingly Break The Law

By Eric McGehearty
culled from:forbes.com
Why did you start your own business? To be your own boss, bring something new and innovative to the market, or better support your family? Given the amount of work it takes to get a successful business off the ground, we’re betting your reasons were good.
In the beginning, entrepreneurs are generally consumed with essential to-dos like finding an office space, hiring staff and setting up shop. However, in the wake of these exciting early-stage developments, executives sometimes overlook certain legalities which can lead to serious charges down the line.
As Mick Mickelsen of Broden & Mickelsen explains, “There are times when businesses, usually inadvertently, break the laws but do not realize they’ve crossed the line into criminal conduct. Executives may suspect they could be sued, but most never think they’ve committed something egregious enough that they’d be prosecuted under the full extent of the law.”
So how is it that so many businesses and entrepreneurs unknowingly break the law, especially when they’re just starting out?
We teamed up with our clients at three respected DFW law firms – Broden & Mickelsen, Powers Taylor, and Stanton Goldberg – to find out. According to our legal experts, here are 10 ways businesses can unknowingly break the law and open themselves up to being prosecuted.

1. Failure to make federal payroll tax deposits.

Startup companies or companies with insufficient working capital will often not pay their federal payroll tax deposits, leaving them more cash flow. Many companies consider this to be a working capital loan of sorts, and merely anticipate paying interest and penalty costs to use that money.

2. Inadvertently allowing the destruction of documents relevant to a litigation.

When in litigation, you are under legal obligation not to destroy anything which could be classified as relevant evidence. Often this involves electronically stored evidence like emails or text messages. It’s therefore a good idea to have a documentation policy in place that prevents employees from unwittingly deleting items which could end up being the smoking gun in a trial.

3. Improper use of investor funds.

In short, anytime a businessperson is acting as a fiduciary (ie: taking money from people in trust) he or she must be very careful how it’s spent. For example, if the owner of a promising startup were to misuse investor funds to, say, drive a Porsche, or otherwise live a lavish lifestyle in order to project an image of success, that’s an obvious issue. Mickelsen’s recommendation? “If you’re engaging in any kind of activity that your grandmother would not approve of, then you have a problem.”

4. Not charging, reporting or collecting sales tax.

Historically this has been a big issue in the convenience store industry where the underreporting of sales was a common business practice. Stanton Goldberg says, “You also see this within industries such as landscaping where sales tax is not charged or paid by smaller companies who are looking to leverage a cost advantage when pricing their services. Though it may shave approximately 8% off their price structure, it can cost thousands more in litigation.”

5. Overselling your qualifications when bidding for a government contract.

Say a business owner responds to an RFP (request for proposal) and falsely claims their company has the experience, qualifications or resources to fulfill a contract within a certain period. While this would be unethical by any standards, a business should always work under the assumption that, “If I am lying to the government, I could be prosecuted” as the rules are different if you are dealing with the government versus another business entity.  

6. Failing to mark patented products.

Think of this one as a way to keep other companies in your network from breaking the law, and as a means of protecting your intellectual assets. Essentially, if you are a patent holder and seeking to assert patent rights against third parties or want recourse for willful damages in the event of infringement, make sure to mark items with your patent number and/or an indicate that you’re undergoing the patent process with link to a website that has more information.

7. Non-compliance with federal wage and hour statutes.

This can include things like employing individuals without valid Social Security numbers (SSN) or taxpayer identification numbers (TIN) to avoid payroll taxes, misclassifying of employees or failing to properly pay in compliance with the law. An example would be an employer who believes that an employee is not entitled to overtime wages because they are salaried, when in reality, the employee’s job duties are such that they are considered non-exempt under the law.

8. Mistakenly selling a recalled product.

To avoid this high-liability scenario, Powers Taylor recommends checking the Consumer Product Safety Commission’s website, which frequently updates its recall list. How often you should check it depends heavily on what type of product you offer. For example, companies selling items used for babies are advised to check more frequently.

9. Improperly billing for government services like Medicare.

Generally, there are strict rules about how healthcare organizations can bill for Medicare related expenses. Since Medicare is a government provided service if you change that billing structure, or if you break those rules, you may only realize you’ve done something wrong when Federal Agents are raiding your hospital or medical practice.

10. Claiming excessive or improper itemized deductions on one’s tax returns.

Some individuals and tax return preparers will attempt to reduce the taxpayer’s tax liability by claiming excessive or improper itemized deductions. These can include charitable contributions or an overstatement of business mileage expenses. It can also involve deducting personal expenses as business expenses. This would be things like identifying food costs as business meals, deducting personal travel as business travel, or claiming ownership costs of personal real estate as a business expense.

In the end, it’s rare that business owners set out to intentionally break the law and end up on the stand. However, educating yourself early on can help insulate you from being prosecuted in the long run.

*Disclaimer: This article discusses general legal issues, but it does not constitute legal advice.