New small business owners get advice from all different directions. Like when adopting a puppy or having a baby, suddenly everyone’s an expert and wants to share their opinion. If you’re just starting a business, it’s more important than ever to get your information from trusted sources. After all, the future of your business and the financial well-being of both you and your employees is what’s at stake.
If you’ve recently started a business, or are thinking about starting one, you might have heard that you need workers’ compensation insurance. In most states, this is true for any business with at least one employee (even if they’re only part-time). You also may have heard about other types of small business insurance like general liability insurance or commercial auto insurance. Each of these coverages, along with many others, are valuable protections for your business and its employees, whether required by state law or not.
Although small businesses have many legitimate needs, there are also several ways people may seek to take advantage of new small business owners. Here are three common scams you might find yourself targeted with. Each of these scams is particularly tricky to spot because they’re based on a grain of truth. Armed with the right knowledge, you’ll be able to identify the common indicators of a small business owner scam.
You’ve just started a business, congratulations! This may have included registering with your secretary of state, applying for a business license with your city or county, and other legitimate legal steps. The last thing you want right now is to think your business isn’t “in good standing” with any government entity. That’s why this scam can be so effective at getting money from new business owners.
Small business owners across the U.S. frequently receive letters in the mail shortly after forming their business entity (often an LLC). These letters claim to offer a “certificate of good standing” or in some cases a “certificate of status.” Either way, this is a bogus offer and it’s unclear what (if anything) business owners will actually receive if they send in the requested money.
According to the Pennsylvania Department of State, such certificates are not required by the government and are usually only needed for things like business loans or mergers. If you do need one, the state offers a legitimate certificate of your business’s status for $40. Not, as the scam letters offer, $89.95 or more.
Whatever state you live in, the scam remains the same. You’ll get an official-looking letter in the mail with a lot of misleading information so that business owners will easily mistake it for an official form. In all but the most egregious cases, these letters will have some indication (probably in very small print) that they are not in fact official, legal documents from your state. As you’ll see in the next examples as well, this scam relies on the naivety and good intentions of new small business owners who truly don’t want to be on the wrong side of any compliance laws.
Once your new small business is up and running, you might be ready to hire your first employee. If you do, don’t forget the very real requirement in most states for workers’ comp insurance. However, beware of scams like this one that try to sell new employers overpriced labor law posters.
While it’s true that employers do often need to display labor law and minimum wage posters to comply with Occupational Safety and Health Administration (OSHA) and Department of Labor (DOL) regulations, these posters are available electronically at no cost online. Here’s a link to OSHA’s website where you can download the poster for free.
According to the Better Business Bureau, these scams often target new small businesses with scare tactics and threats of exorbitant “fines” for violating the law if they don’t send money to the scammers.
To avoid falling victim to this or any other small business owner scam, make sure to read the fine print on any letters you get. It’s also important to do your research and find out if you’re genuinely required to do what the letter instructs. A simple online search for the type of “notice” you receive may reveal its bogus status.
After you’ve been in business for nearly a year, and you’ve successfully avoided giving your money away for free labor law posters or unnecessary certificates of status, it’s time for a new scam to emerge.
Every state has some form of what’s known as periodic filing or a periodic report for businesses. Most states require it annually or every two years, though some states might have even less frequent requirements. Whatever the case, this periodic filing is a legitimate requirement from your state. What’s not legitimate are the letters you’ll get from third parties offering to perform the filing for a large additional fee.
In Colorado, for example, an annual state business filing fee is just $10. Yet small business owners get letters in the mail offering to complete this filing for an additional $60 to $100 fee. Considering Colorado allows business owners to file this quick and easy form online for $10, there’s no reason to pay someone additional money to do it for you. But you wouldn’t know that from the letters you get in the mail!
Once again, these letters look official. They have information about your business that can make them seem legitimate even though they’re not.
You may have noticed a pattern here. Each one of these scams plays on new business owners’ fears of stepping out of compliance with the law. Each scam delivers an official-looking letter by postal mail to the business’s registered address. It can be hard to believe something that looks so official and has so much of your information isn’t from a legitimate source.
Here are a few tips for recognizing and avoiding these fraudulent and predatory scams:
While the three scams we’ve covered here rely on postal mail, there are even more ways to fall victim to online fraud. This link from the U.S. Small Business Administration has tips on avoiding online small business scams as well.
Remember, one thing you may hear as a new small business owner is the need for workers’ compensation insurance, which is true for most businesses even if they have only one employee. To learn more about workers’ comp insurance and other types of small business insurance, check out our workers’ comp 101 resources.