Top 10 Legal Mistakes Every Startup and Small Business Owner Should Avoid
Starting and running a small business involves dealing with a variety of legal issues. Unfortunately, many business owners are not well-versed in legal matters and end up making costly mistakes that could result in litigation, financial penalties, or even closure of the business. Avoiding common legal mistakes is critical for any startup or small business owner.
In this comprehensive guide, we will cover the top 10 legal mistakes small business owners tend to make and provide tips on how to steer clear of them. Whether you’re just starting out or have been in business for a while, being aware of these pitfalls will help protect your company and assets. Read on to learn what legal missteps to look out for and how to seek good legal counsel when needed.
What Is the Right Business Structure for My Company?
One of the first decisions that business owners need to make is choosing the correct structure for their company. The business structure you select determines issues like ownership, liability, taxes, and more. Many small businesses start out as sole proprietorships or general partnerships, which expose the business owner(s) to personal liability. As your company grows, it becomes wise to form a limited liability company (LLC) or corporation to protect your personal assets. Working with a business lawyer can help you determine the ideal structure.
Common mistakes: Failing to create a legal entity; choosing the wrong structure
How to avoid them: Consult with legal counsel to decide between an LLC, corporation, or other option. Make sure to formally register your business.
Do I Need Any Business Licenses or Permits?
Depending on your industry, location, and other factors, you may need special licenses or permits to operate legally. Research requirements at the federal, state, and local levels to ensure you have all necessary credentials. This may include tax licenses, food handler permits, professional licenses, and more. Staying compliant prevents penalties down the road.
Common mistakes: Neglecting to acquire required licenses/permits
How to avoid them: Research which credentials are mandatory for your business type and location. Apply for them before opening doors.
What Agreement Should I Use to Hire Contractors?
Many businesses bring on independent contractors for short-term projects or specialized services. Legally, contractors differ from employees. Using proper agreements for both classifications is essential to avoid IRS penalties and legal issues. For contractors, you need independent contractor agreements outlining pay rate, project scope, term length, and more.
Common mistakes: Misclassifying workers as contractors; lacking written contractor agreements
How to avoid them: Understand legal differences between contractors and employees. Use written contractor agreements defining the relationship.
Have I Protected My Business’ Intellectual Property?
Intellectual property (IP) refers to creations of the mind, like trademarks, copyrights, patents, and trade secrets. IP theft is rampant and can destroy businesses. Using nondisclosure agreements, licensing content, registering trademarks/copyrights, and being vigilant about security are all ways to establish legal rights over your IP.
Common mistakes: Not protecting intellectual property
How to avoid them: Identify your IP and take measures to legally protect it, such as trademarks and copyrights. Also use NDAs and encryption. Consult an IP lawyer.
What Issues Could Arise from My Website and Content?
Websites and blogs contain various types of content that could lead to legal hot water, from user-generated content to product images and text. Defamation claims, privacy violations, copyright infringement, and issues around terms and conditions represent some hazards. It’s wise to develop a thorough content strategy, seek user consent, use original media, and confer with legal counsel.
Common mistakes: Publishing unvetted third-party content; violating privacy regulations; infringing copyrights
How to avoid them: Carefully vet UGC; craft and comply with clear terms and conditions; use original text/media; obtain permissions as needed.
Am I Compliant with Employment Laws?
Hiring employees triggers a whole subset of legal obligations, including minimum wage, overtime, discrimination, health and safety mandates, and more. Even basic hiring paperwork like I-9s need to meet regulations. Developing strong HR policies and procedures will help you fulfill all requirements as an employer.
Common mistakes: Skirting employment laws around hiring, pay, discrimination, safety, etc.
How to avoid them: Ensure HR policies follow laws and that managers are helping enforce them. Work with an attorney to develop an employee handbook, contracts, and best practices.
Could My Business Be Sued for Anything?
Lawsuits target both large and small companies regularly. Common causes include breach of contract, workplace discrimination, trademark disputes, data breaches, false advertising claims and more. Going over policies and risk areas with legal counsel can help you avoid scenarios likely to spur litigation. You also need proper insurance to cover legal defense costs.
Common mistakes: Lacking vigilance around risks that lead to lawsuits; missing insurance coverage when legal action hits
How to avoid them: Work with lawyer and insurer to understand vulnerabilities you face. Tighten policies and procedures in problem areas while ensuring adequate coverage exists.
Are My Customer, Partner, and Vendor Agreements Legally Sound?
In business, written agreements govern relationships and transactions with customers, partners, vendors and more. They stipulate terms around payments, refunds, usage rights, confidential data, liability, and much more. Yet many owners use weak templates or verbal agreements prone to misunderstanding. Ensure yours align with laws and protect your interests.
Common mistakes: Using flawed or non-existent agreements with third parties
How to avoid them: Develop templates, such as T&Cs, EULAs, SLAs, NDAs, etc. that comply with laws and address liability, IP, fees, scope change, disputes, and other key aspects of the deals. Use qualified business lawyers for documents involving substantial risk or investment.
Am I Meeting Data Protection, Privacy and Security Regulations?
As data breaches run rampant, governments impose stricter mandates around cybersecurity and safeguarding private customer and employee information. From PCI-DSS to HIPAA, CCPA, and other emerging laws, the regulatory environment is complex. Building a cyber-aware culture through technology controls, strong policies, and training helps mitigate gaps.
Common mistakes: Privacy and security missteps violating data protection laws
How to avoid them: Continually assess your structure, tools, and policies around data handling as related laws evolve. Identify yours and customers’ rights. Implement controls aligned to best practices. Work with specialized legal counsel on information security.
What Issues Exist Around My Equity and Investors?
Cap table management, shareholder rights, equity vesting, preferences, voting procedures, and investor agreements require meticulous attention – especially regarding decision authority and potential dilution. Without clear governance that engages early stakeholders, you risk discord and legal battles.
Common mistakes: Poorly structured shareholder and investor relations
How to avoid them: Consult closely with legal counsel to develop the necessary agreements addressing roles, vesting, intellectual property, voting procedures and restrictions. Continually keep shareholders informed through official channels.
By taking the right legal precautions and working with qualified business attorneys, you can steer your startup or small business away from common pitfalls in these 10 areas as well as others specific to your situation. Though no business is immune to lawsuits or compliance gaps, staying vigilant reduces preventable legal risks over time. Be proactive about regularly reviewing your policies, contracts, insurance, entity structure, liability exposures and other facets with both internal teams and outside counsel. Addressing issues before they become catastrophic is the key to effectively managing legal matters in business.
In Summary, Major Legal Mistakes to Avoid Include:
- Failure to create a proper legal entity for your business
- Choosing the wrong business structure
- Neglecting licenses, permits and registrations
- Misclassifying employees versus contractors
- Not protecting intellectual property
- Publishing unvetted third-party content
- Violating employment laws
- Lacking preparation for potential lawsuits
- Having flawed agreements with vendors and partners
- Disregarding key data protection laws
- Poor management of shareholders and equity
Being mindful in these areas goes a long way toward avoiding legal troubles that commonly ensnare small business owners. Partner with legal professionals to put the right proactive defenses, agreements and procedures in place as you launch and operate your company. Though legal expertise has a cost, it’s small compared to the crippling damages lawsuits and violations can inflict. Let this guide serve as your roadmap to help spot and swerve around legal pitfalls at every stage of small business growth. Here’s to smooth sailing ahead!
FAQs
Q: What are common legal mistakes made by small business owners and startups?
A: Common legal mistakes made by small business owners and startups include not having written agreements in place, failing to protect intellectual property rights, choosing the wrong business entity, not seeking legal advice when needed, and entering into agreements without understanding the legal consequences.
Q: Why is it important for small business owners to seek legal advice?
A: Small business owners should seek legal advice to ensure they are making informed decisions, to avoid common legal mistakes that could result in legal issues or disputes, and to protect their business from legal vulnerabilities.
Q: What is the significance of having an employment agreement in writing?
A: Having an employment agreement in writing is important to clearly outline the terms of employment, protect both the employer and employee’s rights, and to avoid potential disputes or legal issues in the future.
Q: How can small business owners protect their intellectual property rights?
A: Small business owners can protect their intellectual property rights by registering trademarks, copyrights, or patents, implementing measures to safeguard confidential information, and including intellectual property clauses in contracts with employees and business partners.
Q: What legal mistakes are commonly made by startups?
A: Startups commonly make legal mistakes such as neglecting to establish a proper business entity, not drafting agreements with co-founders or shareholders, overlooking the importance of getting legal counsel early on, and failing to address disputes or litigation issues proactively.
Q: How can small business owners avoid making critical legal mistakes?
A: Small business owners can avoid making critical legal mistakes by seeking professional legal advice, understanding the legal implications of their actions, having written agreements in place for all business dealings, and being proactive in addressing any legal issues that may arise.
Q: Why is it important for small business owners to have agreements in writing?
A: Having agreements in writing helps clarify the rights and responsibilities of all parties involved, provides a reference in case of disputes or misunderstandings, and can serve as legal protection in the event of litigation or arbitration.
