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10 Common Small Business Legal Mistakes That Can Cost You Big Money

Ignorance of the law excuses no one

17May

Starting a new business venture is one of the most exciting endeavours that anyone can take on in life. Because of the excitement that comes with starting a new business, many entrepreneurs get started without making sure that their legal 'ducks are in a row'. This is one of the most common mistakes that new business owners make and it often comes back to bite them. Here are some of the most common legal mistakes that small businesses make. 

1. No Shareholders’ Agreement

If you have multiple owners in the company, having some kind of shareholder agreement is essential. Many companies just start doing business without taking the time to have a shareholders' agreement drawn up. Without an agreement, there is nothing documenting the shareholder's responsibilities and duties.

Another common issue that comes up is someone trying to leave the company, and then no one knows how to handle their shares. What if one of the owners of the company dies or gets divorced? There are all kinds of scenarios that can arise, and a good shareholder agreement can overcome them before they show up.

2. Failure to Protect Intellectual Property

If you don't take the time to protect your intellectual property right at the beginning, it could cause major problems down the road. Typically, it's easier to get a patent, copyright, or trademark at the beginning of the process instead of waiting until later. 

Another common mistake involving intellectual property is failing to get employees to sign non-disclosure and non-compete agreements. Later on, employees are less likely to sign these documents, and they could take your secrets along with them.

3. Not Having Proper Contracts with Outside Vendors

The temptation to do business with a handshake is real for many new business owners. They may jump through hoops and take on debt because a prominent customer wants to do business with them. In reality, you should never take on large business obligations for an outside vendor without the right contract in place. If you're purchasing raw materials from an outside source, make sure that you get the pricing and terms in writing. Oral agreements are typically not enforceable and it's much safer to get it in a contract. 

4. No Human Resources Policy

Employees can be one of your most valuable resources as a business owner. If you don't handle them and the legal issues surrounding them properly, they can be one of your biggest problems. It's critical to have a clearly defined HR policy and handbook when you hire employees. This can help you avoid future lawsuits from your employees when they leave on bad terms. Federal laws require you to keep certain documents on every employee. In addition to documents, you have to treat every employee equally and set clear expectations for them.

5. No Incorporation

A lot of small businesses just start doing business before they take the time to create a legal entity for the business. This opens you up to a world of liability and issues. There are sole proprietorships, LLCs, S corporations, partnerships, and corporations and each one of them has pros and cons to consider when starting a business.

When you don't setup the correct legal structure for your company, it can hamper your ability to do things later on. You may want to get outside investors, take on company debt, or negotiate a special deal, but it's impossible without the right structure. By not keeping the right type of records, you may also open yourself up to personal liability instead of being protected by a legal business entity.

6. Failure to Follow Business Tax Laws

Many new businesses fail to follow basic business tax laws such as paying payroll taxes for employees and sales tax. It's a good idea to seek out the advice of a professional accountant when you're getting started. You may also want to hire a payroll service to automate the process of paying all of these taxes for you. The penalties for not doing this can be severe and it's in your best interest to comply.

7. Not Having 'Terms and Conditions' Policy for Your Customers

If you have a business website, it's a good idea to have terms and conditions displayed for your potential customers. Give them an option to check a box that says they read and agree to the terms and conditions. The agreement should include all the details about your products and services, and take out all of the 'grey area' surrounding your business. 

8. Failure to Have a Customer Privacy Policy

When you collect personal information of your customers, you need to have a privacy policy. This policy outlines what you will do with their information and helps them feel safe in giving you their info. If you plan on sharing their information with other parties, then you need to disclose this to them when you collect it. 

9. Misunderstanding Copyright Laws

Many new businesses post content that they find online on their social media platforms or in email newsletters. You may use someone else's content just to supplement your own. While you might think that you're covered under "fair use" or some other provision, there's a good chance that you're infringing on copyright laws. Make sure that you are familiar with how copyright laws work and comply with them at every turn.

10. Not Having an Attorney

Trying to go it alone in business is a big mistake. Hire a competent business attorney on the front end and let them set you up with everything correctly. A good attorney will help you navigate the legal waters of starting your own business before get too far along. 

Report any employee injuries to your workman's compensation carrier and do not try to hide them. While it might cost you a little bit of money in insurance premiums, it'll cost you less later on.

Overall, there are a lot of ways that legal problems could derail your business venture before you get started and cost you money down the road. Make sure that you take the time to get things set up correctly from the beginning and your chances of success increase substantially. 

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