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Common Legal Mistakes Small Businesses Make

  • Legal oversights are common in small business, but can be costly as well
  • Proper documentation, intellectual property protections, other essential steps to safeguard your business
  • Understand and stay compliant with all legal requirements

Many entrepreneurs consider their business to be too small, at least at the outset, to prompt legal requirements. Yet any company can be vulnerable to fines or legal challenges if they don’t clearly outline their responsibilities or if they fail to abide by business rules.

Here are some of the most common legal mistakes that small business owners make:

Not getting legal counsel

Meeting with a business attorney can save you a lot of hassle down the road. While this consultation will require you to spend some money, it’s a wise investment to make sure you’re aware of all legal requirements. This will also establish a relationship with an attorney you can turn to if you need legal counsel in the future. Seek recommendations for a good business attorney in your region and set up a meeting before you launch your company.

Choosing the wrong business structure

Entrepreneurs often launch their company as a sole proprietorship, where the business and owner are functionally the same entity. While this is a simpler setup, it also deprives you of liability protections. LLCs, C corporations, S corporations, and nonprofits are often a wiser choice; understand the difference between them and choose the structure that best suits your company.

Insufficient documentation

With so many responsibilities and limited time, entrepreneurs may be tempted to turn to handshake agreements or other informal promises. This can streamline matters, but leaves you without a written agreement if any disagreements pop up.

Proper documentation is key

in any business. You’ll need to make sure you have all essential contracts and liability protections in place, such as outlining employee responsibilities, setting up clear agreements with vendors or clients, establishing a shareholder agreement, and creating a privacy policy on what customer information can and cannot be shared. You’ll also need to make sure you’re keeping any necessary records, such as the minutes of board of directors meetings.

Not protecting your company’s intellectual property

Your intellectual property is any product, design, or other property that you or your company have created. If you fail to safeguard your intellectual property, it could easily be replicated by a competitor and deprive you of valuable assets.

Patents, copyrights, trade secrets, and trademarks are some ways to protect your personal property. You can also help safeguard your intellectual property by requiring employees to sign non-disclosure and non-compete agreements.

Not being aware of legal requirements

Many businesses require you to have certain licenses, certifications, or other prerequisites to abide by laws and regulations. You’ll need to understand all of the requirements you must meet and have them in place before your launch your company.

You’ll need to make sure you’re not overlooking any taxes you’re obligated to pay. One common oversight is a failure to remit payroll or sales taxes that must be paid to government agencies. Business taxes can be complicated, so consulting with an accountant can be a wise move.

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