Starting a small business is an exciting venture, filled with passion and innovation. However, in the rush to get operational, many entrepreneurs overlook critical legal details that can lead to significant problems down the road. As an independent lawyer dedicated to helping small businesses thrive, I've seen a few common missteps time and again. Here are five of the most frequent legal mistakes and how you can steer clear of them.
1. Choosing the Wrong Business Structure Many new business owners start as a sole proprietorship by default because it's the easiest path. While simple, it offers no personal liability protection, meaning your personal assets are at risk if the business is sued.
- How to Avoid It: Take the time to understand the differences between sole proprietorships, partnerships, limited liability companies (LLCs), and corporations. An LLC is often a good choice for small businesses as it provides liability protection without the complexities of a corporation. Consulting with a lawyer can help you select the structure that best fits your long-term goals and risk tolerance.
2. Neglecting a Written Partnership Agreement Going into business with a partner is like a marriage; you need to plan for all eventualities. Relying on verbal agreements can lead to disputes over responsibilities, profits, and what happens if one partner wants to leave.
- How to Avoid It: Always draft a comprehensive partnership agreement. This document should clearly outline profit and loss distribution, roles and responsibilities, decision-making processes, and a dissolution strategy. It’s a foundational document that protects everyone's interests.
3. Not Protecting Your Intellectual Property Your brand name, logo, and unique products are valuable assets. Failing to protect this intellectual property (IP) leaves you vulnerable to competitors who can use your hard work to their advantage.
- How to Avoid It: Register your trademarks and copyrights. A trademark protects your brand identity, while a copyright protects original works like software, website content, or marketing materials. If you have an invention, consider a patent.
4. Using Vague or Informal Contracts Whether it’s with clients, vendors, or employees, using poorly written or informal agreements is a recipe for disaster. Ambiguous terms lead to misunderstandings and disputes that can be costly to resolve.
- How to Avoid It: Insist on clear, written contracts for all business dealings. These contracts should specify the scope of work, payment terms, deadlines, and confidentiality clauses. Don’t be tempted to download a generic template from the internet; a contract tailored to your specific situation is always worth the investment.
5. Misclassifying Employees as Independent Contractors To save on taxes and benefits, some businesses incorrectly classify their workers as independent contractors when they are, legally, employees. This can result in severe penalties from tax authorities, including back taxes and fines.
- How to Avoid It: Understand the legal tests for determining worker status. Generally, the more control you exert over how, when, and where a person works, the more likely they are an employee. When in doubt, it is safer to classify a worker as an employee or consult a legal professional to ensure compliance.
Conclusion Avoiding these common legal pitfalls can save you immeasurable stress and expense. By building a strong legal foundation, you can focus on what you do best: growing your business. If you have questions about any of these issues, don't hesitate to reach out for a consultation.
