7 Legal Mistakes that Small Business Owners Can't Afford to Make

Entrepreneurs are always looking for ways to cut costs and maximize value. They may think of legal services as an unnecessary expense and try to get away with using DIY forms on the internet rather than seeking the advice and expertise of a qualified attorney.

This strategy could prove to be very expensive down the road and even put you at risk of going out of business. Here are some of the most expensive legal mistakes entrepreneurs make, and what you can do to avoid them.

1. Selecting the Wrong Business Entity

First thing you should do is to choose the right business entity and set it up correctly. From sole ownership to corporation, each entity has its own advantages and disadvantages. Make the right choice and set your business up legally. 

Choosing the wrong entity will expose you to personal liability for your business actions and could cause you financial troubles.

2. Not Getting Your Agreements Documented

Handshakes and oral agreements are popular, but you must have documented agreements. The document itself does not need to be complicated, but you want to be sure to identify each party, write out their obligations, agree on a method to resolve disputes, and detail under what situations the contract will be terminated.

3. Breaking Employment Laws

This is a big area of risk in your business, you MUST abide by the employment laws. A common mistake among small business owners is not classifying team members as either employees or independent contractors. Does this even matter?

Yes. Wrongfully classifying an employee as an independent contractor means that you're breaking Employment and Industrial Relations laws. If you are not sure which category your team members should be in, it’s worth it to work with a qualified business attorney to make sure you are doing things by the book.

4. Starting a Competing Business While Still Employed

Don't start a competing business while still working at your current job. If you want to compete with your employer, do it in a way that does not leave you at risk of a lawsuit and protects you if you do get sued. Be sure to review your employment agreement for a non-compete clause.

If there is one, look for a qualified business attorney to ensure you don’t violate those provisions. And if you do launch a business in competition with your former employer, consider buying insurance to decrease your losses if you are sued. The price of defending a lawsuit, even if you win, could put you out of business before you even start.

5. No Protection to Your Intellectual Property

There is no specific definition of “intellectual property” but it can be divided into the areas of trademarks, patents, copyright, designs, and confidential information. If you don't think you have any intellectual property, check again. If you own a website, that's intellectual property. Same goes to your logo, copy and brand. They are all worth protecting.

Work with a business attorney who will help you not only preserve your intellectual property but help you maximize its potential value.

6. Not Having a Will or Trust

Every entrepreneur should at least have a will or trust, financial power of attorney, and succession plan to ensure a smooth transition in the event of your incapacity or death. Don't try to draft these documents yourself, because if it's not drafted or executed properly, it will cost you a fortune.

Look for an estate planning attorney who is an expert at working with small business owners so your estate plan can be done correctly and aligned with your business goals.

7. Do You Know What You Don't Know?

There is a lot to learn about documenting agreements correctly, buying the right insurance, and understanding which tax rules you should be following when running a business. Don't have the time to learn about all the rules?

Work with a business attorney who will proactively avoid costly mistakes, especially the mistakes you don’t even know you are making.

8. No Advisors to Support You

All successful businesses have a team of advisors to support them, and so should you. You’ll want to find a bookkeeper who can keep track of your revenue and expenses and someone who can advise you on taxes and maximize your deductions. A financial advisor can help you with financing the growth of your business.

Lastly, hire an attorney who is business-savvy and understands the entrepreneurial spirit. Who better to help guide you than a lawyer who knows about the challenges you're facing? This will ensure your business is not breaking any laws, proactively manage risk, and provide you with a trusted advisor you can depend on.

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Source: Forbes

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