Starting up a business is exciting. However, you need to do the not-so-exciting-but-very-important – your due diligence, that includes taking care of your small business legalities. Neglecting business legal issues will bring you potential problems in the future (I know because I’ve been there!) – so it’s obvious that you need to take a good care of your business legalities.
10 legal mistakes small business owners make
While you are preparing your startup, here are 10 legal mistakes you should avoid to make when starting up and running your small business:
1. Choosing the wrong business structure
Regardless of your small business’ potential, choosing the wrong business structure – sole proprietorship, S-Corp, or LLC – will bring you potential legal issues later on, such as unexpected tax bills at the end of the year. With regard to organisational structure, please consider a simple, lean organisational structure that encourages responsiveness to changes in the future. Don’t structure to accomodate potential investor who doesn’t yet exist, to make your company easier to go public – it’s wasting too much unnecessary resources a small business need to grow.
So, be sure to carefully consider your options and make a well-informed decision.
2. Hiring inexperienced business lawyer
Lawyers who have no experience working with entrepreneurs and venture capitalists would focus on the wrong things while neglecting the all-important legal issues a small business owner shoult focus on. So, be sure to hire a small business lawyer who knows what he is doing.
3. Thinking that legal issues can be solved later
The common mistake a startup can make is to get everything up and running – planning, funding, marketing, etc. – but fail to protect what’s been working on by hiring the right lawyers. Heed this: It will cost much less to start right than to settle your legal issues later.
4. Making business deals without put them in writing
I’ve heard scary stories of small business owners who lost a lot of money – some even went out of business – because they have got scammed their so-called clients, partners or vendors. Even if someone who you are dealing with is ethical and honest, without a written contract you and your clients/partners/vendors can have different ideas about one issue. So, yes… it’s a must – always put your business dealings in writing.
5. Establishing a 50-50 partnership
Although it sounds great, a 50-50 partnership is the one that is deemed to be a bust. A 50-50 partnership will mean that neither of you can be a real decision maker. If there’s a deadlock and you and your partner don’t agree to it, your company is in limbo. So, yes – even a 51-49 partnership would work great.
6. Over-promising in your business plan
For the sake of getting business funding and better business valuation, you need to make an honest appraisal in your business plan. Otherwise, your business can be considered as fraud (promising something that you know you can’t deliver is a fraud!) What’s more, doing so can destroy your credibility and lose your investors’ trust – and yes, you can get sued by your funders for such fraud!
7. Filing a trademark without doing your homework
Before you file a trademark, be sure to check registered trademarks in the Patent and Trademark Office’s database. You don’t want to register something that someone has already done it – this will lead to legal issues, and can lose you a lot of money when the real trademark owner sues you.
8. Failing to ensure that your business owns the intellectual property
To cut costs, startups are typically outsource to independent contractors. If you do, be sure that you own any intellectual property created on your business’ behalf. You need to have an agreement with your independent contractors regarding the intellectual property.
9. Copying other company’s standard-form agreements
I can’t blame small business owners who want to save money – we all do! However, saving money by using standard-form agreements from other companies is not a good idea. The reason is simply because what best-fit other companies don’t mean it will fit in well with your company’s legal needs.
10. Not having your employees sign for non-disclosure agreement
If you run a, for example, restaurant business, you need to protect your trade secrets – you need to have your employees to sign a non-disclosure agreement, in such a way that there will be a legal binding that prevent them to work for your competitors or start their own business using your trade secrets.
On the other hand, if you hire someone without checking his/her agreements with the previous employer, you can face potential legal issues. So be sure to do proper background check to avoid (costly) legal issues in the future.
Takeaway
No matter how you hate anything related to small business legal needs, you need to take a good care of them. The best medication is prevention – so it’s better to get things right from the start rather that trying to putting out fires burning your business later on.
Ivan Widjaya
On small business legal mistakes to avoid
This post is brought to you by Robert Reeves, an experienced DUI lawyer in South Carolina.
Reference: Harvard Business School’s Working Knowledge, OPEN Forum, LawPivot Blog, and Entrepreneur.com
Disclaimer: This article is not a legal advice – it is for informational purpose only. For legal advice, be sure to seek the help from experienced lawyers.