Everyone makes mistakes. Every new small business owner makes mistakes. However, some of those mistakes can very easily be avoided with a little bit of knowledge. Help avoid some common pitfalls by learning from the four biggest legal mistakes that every small business owner makes.
#1 Wearing too many hats & not seeking legal help
When you are starting your business, it may feel like you are supposed to, should be, or even forced to, wear ALL of the hats. Your hands are full, juggling designing your product, customer service, business plans, advertising initiatives, marketing strategies, legal concerns, and so much more. Obviously, no one is equipped to be perfect in all of those positions, and mistakes are easily made. When that mistake is of a legal nature the consequences can be huge.
Taking off the “legal advice” hat and hiring an attorney to consult may be the top way, as well as the easiest way, to avoid legal mistakes. An attorney can help you avoid a wide variety of future legal issues. Some examples include:
- Ensuring proper legal protections are in place (e.g., writing disclaimers/contracts/agreements)
- Negotiating fair real estate terms (e.g., storefront leases)
- Assisting with obtaining any applicable licenses/registrations/trademarks etc.
- Advising on tax issues.
If the cost of the attorney is what worries you, some attorneys offer more affordable options. For example, there may be a monthly retaining fee for a set amount of hours of help per month or flat fees for specific items. A bit of money up front may help you to avoid a major legal headache (and expense) later.
#2 Not choosing the right business structure & not registering properly
There are many options for structuring your business and which structure is best will depend on your specific circumstances. The basic options are:
- Limited Liability Company (LLC)
- Sole Proprietorship
- Limited Partnership
- Limited Liability Partnership
Overwhelmed yet? Beyond these basic options there are sub-options too, such as S-Corporations and C-Corporations.
Determining which business structure is best for your particular business is important in a number of ways, including:
- Having the right structure for tax purposes
- Having the right structure to protect your personal assets
- Having the right structure to protect your business assets
- Organization expenses
Just defaulting to ‘sole proprietor’ and moving on is not enough! Doing research on these business structures and seeking a professional opinion, such as from an attorney, about which to choose will be vital to your businesses’ success.
Beyond choosing your structure, you must then learn what your jurisdiction requires for registration and follow all of the jurisdiction’s steps to a T. Don’t just rely on an online service to register for you. Do a little grunt work and make sure all the steps have been followed. If you don’t want to utilize an attorney to help you register, utilize your jurisdiction’s government office to assist you. They will have a wealth of information available to help you on your way.
#3 Not putting it in writing
Everything needs to be in writing! Ok, you have a boilerplate contract. Is that enough to count as “everything”? Probably not! Some examples of where you need to make sure that you have ‘put it in writing’ include:
- Customer agreements/contracts
- Terms of Services
- Employment agreements
- Business relationship agreements (e.g., with vendors)
Remember to be detailed in your writings. Always include party names, contact information, details of each party’s duties and expectations, etc. where applicable.
Beyond these official documents, it is best to put what you may consider casual conversations in writing. If a court case ever arises about a customer’s expectations about your work and you can prove something by showing an email versus stating you had a conversation about it, you will be well ahead of the game.
#4 Not educating yourself on legal parameters surrounding your business
You don’t need to go to law school, but you should know the basics of laws affecting your business. Of course, what you will need to know will vary widely based on what your business is. For example, if you need to trademark or copyright something for your business you need to generally know the differences between the two and how they can protect you.
A little bit of information will help you navigate the legal waters around your business so that you can better protect yourself and your business.
The effort and the investment of avoiding these mistakes on the front end of starting a business can save your business from ruin in the long run.