Starting and running a business involves dealing with a variety of legal issues. While you can’t anticipate every potential legal problem, there are a few common legal pitfalls that many businesses encounter. Being aware of these potential issues can help you avoid them or deal with them appropriately. Here are six of the biggest legal pitfalls that every business should look out for:
Inadequate Business Structure
One of the first legal decisions you’ll make when starting a business is choosing a business structure. Will you be a sole proprietorship, partnership, corporation, or limited liability company (LLC)? Each structure has different legal and tax implications in terms of liability protection, taxation rules, and administrative requirements. Many small business owners simply default to a sole proprietorship because it’s the simplest structure, but this exposes them to unlimited personal liability. A more formal structure like an LLC can limit your personal liability and provide other protections. Consult with an attorney to determine the best structure for your particular business.
No Written Contracts
Many businesses, especially new ones, conduct transactions and deals with a handshake rather than a written contract. However, verbal agreements often lead to misunderstandings and disputes later on. Having written contracts ensures all parties understand the terms of the deal and their responsibilities. Even if it’s a friend or long-time business associate, it’s wise to use contracts for partnerships, major transactions, loans, leases, employment agreements, and other significant business arrangements.
Inadequate Insurance Coverage
All businesses need proper insurance coverage to protect against potential losses and lawsuits that could put them out of business. This includes general liability insurance, property damage coverage, product liability, workers’ compensation, professional liability, and other policies depending on your industry. Work with an experienced insurance agent or broker to conduct a thorough review of your business risks and determine appropriate policies and coverage limits. Also, be sure to check your policies annually and adjust them as your business grows and changes.
Improper Employee Classification
How you classify employees (independent contractor versus employee) has significant legal and tax implications under federal and state laws. Classifying a worker as an independent contractor when they should legally be considered an employee can lead to fines, back taxes, and penalties if the misclassification is discovered in an audit. There are guidelines like who controls the work and provision of tools and training that determine proper classification. Review these issues with a lawyer when bringing on new workers to avoid misclassification mistakes.
Lack of Required Licenses & Permits
Virtually all businesses need some type of licensing to operate legally, whether it’s a local business license, professional license, food service permit, building permit, or federal license like an EIN from the IRS. Perform due diligence to identify and obtain all of the licenses and regulatory permits you need at the federal, state, and local levels before starting your business. This prevents fines or delays in getting up and running. An attorney or SBA advisor can help identify required licenses.
No Intellectual Property Protection
Any original work, creative assets, or innovations related to your business should have intellectual property protection. Not patenting an invention, trademarking a logo, or copyrighting written works and graphics can enable competitors to legally use your IP or decrease its value. Work with an attorney to identify IP worth protecting and file for patents, trademarks, or copyrights. Also seek protection for brand names, images, documents, website content, and proprietary processes. Proper IP protection is critical for creators, inventors, and technology companies.
Businesses should always have access to a trusted business attorney for counsel in navigating the myriad of laws impacting every business and industry. Taking appropriate measures from the start to comply with legal requirements and protect your assets can prevent painful problems from derailing your entrepreneurial dreams.
Avoiding these common legal missteps takes some work up front with setting up proper business structures, contracts, insurance, and intellectual property protections. But an ounce of prevention is truly worth a pound of cure when it comes to staying out of legal hot water. Taking appropriate measures from the start to comply with legal requirements and protect your assets can prevent painful problems from derailing your entrepreneurial dreams.
