One of the last things that may be on a business owner’s mind when starting a company are legal issues. Unfortunately, many unforeseen issues can be a result of what business owners didn’t think about when starting out.
Here are the top 9 legal mistakes made by small business owners, including what can be done about them (in addition to seeking the advice of an attorney):
- No incorporation. Too many entrepreneurs fail to establish the right legal structure for their company. At some point, this hurts them because they want to get outside investors, founders leave or they get sued by a customer or employee. Not having the right legal structure can open them up for personal liability. What to do: Determine if the best legal structure is an LLC, C or S corporation. Research establishing the company in the operating state or Delaware.
- No shareholders’ agreement. When it comes time to sell the company or a founder leaves, a shareholder’s agreement guides everyone’s actions. Chaos will ensue without such an agreement. What to do: Have an attorney draft a legal document that states how issues will be decided between shareholders and what happens if one leaves, dies or gets divorced.
- No human resource guidelines. Very small companies get in trouble because they do not have employee manuals to guide the conduct of their team. There are famous examples of very successful companies going bankrupt over lawsuits from former employees. What to do: Seek the advice of a human resource professional (or at the very least, professional software) to formulate human resource policies that fit the company.
- Bad-mouthing the competition. The temptation for small businesses to talk trash about their competitors publically or anonymously on the web is growing. Be careful not to libel them. What to do: Seek the advice of an attorney for what is libel and what is freedom of speech.
- Not getting a patent, copyright or trademark. Many small businesses fail to take the necessary steps to protect their intellectual property until another company steps in to take it. What to do: Seek the advice of an attorney to do an inventory of the company’s intellectual property.
- Filing too many lawsuits. People get angry and sue each other. This ends up costing both sides a lot of money and takes the decision out of their hands. What to do: A better solution is always to negotiate rather than litigate. Any good attorney will say the same thing.
- Not protecting the customer data on their website. Small businesses are at greater risk for getting hacked. The problem is not just the website going down, but the possible loss of sensitive customer data. What to do: Explore services like SiteLock to secure the site and the data before it happens.
- Outside investors. Many small business owners bring in outside investors since they are desperate for cash. They then run into disagreement on how the company is to be run and the investors threaten legal action. What to do: Again, the identity of the investor is as important as how much money they bring to the company. Choose very carefully.
- Not remitting payroll tax (or sales tax) to government agencies. Small businesses must legally collect payroll and sales taxes. Not remitting these monies to government agencies will get the small business shut down. What to do: Use a payroll service to remit employer and employee taxes automatically. Set up a separate account for the collection of sales and use taxes.
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