small business legal mistakes

5 Common (and Dangerous) Small Business Legal Mistakes

By Patrick Watt

As a small business owner, you have a lot on your plate. You have to keep customers satisfied, manage employee issues, play marketer-in-chief, and a host of other duties. Failing to ensure that your business is on sound legal footing can cause irreparable damage. Avoid these five common small business legal mistakes that can place your firm in financial jeopardy.

1. Failure to Get a Written Agreement

One of the most common mistakes that small business owners make is relying on a handshake and verbal promise. These agreements may be very difficult, if not impossible, to enforce if something goes wrong. All terms of an agreement, including the duties and obligations of both parties, should be spelled out in writing. Any contract should provide you flexibility and protection in the event the deal goes awry. Failing to get control of creative assets is one example of a common contract law mistake. Many small business owners rely on outside help or even family members or volunteers to help create website designs, business logos, or other services. If the individual is not an employee, the rights to the material vest in the creator and not the company. In the absence of a valid work-for-hire agreement, the individual could resell or otherwise reuse the material they created for you.

2. Using the Wrong Legal Business Structure

Your business structure affects your tax rate, potential liability in the event of a lawsuit, and paperwork requirements. Most small businesses use one of the following four legal structures:

  • Sole proprietorship
  • Partnership
  • Limited liability company
  • Corporation

Each of these structures has its own benefits and drawbacks. For example, a sole proprietorship or partnership may easier to create than a corporation; however, the owners retain personal liability for the firm’s financial obligations. This may not be the best option if your business is likely to face liability. A business attorney or your secretary of state’s website can provide you with detailed information regarding these different business structures.

3. Improper Handling of Payroll Taxes and HR Policies

As a small business owner, you are required to pay federal payroll taxes and to ensure that all federal and state income taxes are reported and paid. Failing to classify employees properly, maintain payroll tax records, or issue W-2 forms to your employees can result in stiff financial penalties, personal liability, and even a criminal investigation by the IRS. A payroll service, human resources manager, or payroll manager is the best defense against these types of mistakes in business.

Even if you only have a small group of employees, you should still handle employee relations and discipline with formality. In fact, most workplace disputes arise out of a real or perceived disparity in the way individual employees are treated for the same issue or offense. The following can help you avoid this common issue:

  • Create an employee handbook outlining company policies, procedures, and expectations.
  • Provide employees with consistent semi-annual or annual reviews.
  • Keep a detailed record of any coaching, counseling, or disciplinary sessions.

4. Not Understanding Patent, Trademark, and Copyright Laws

A patent, trademark, or copyright can prevent others from profiting from your work, ideas, or company identity. On the opposite side, you should check for patents, trademarks, and copyrights before launching your products or ideas in order to protect yourself from costly civil litigation. This includes information that you use on your website or social media marketing. For example, many small businesses share information from other websites or blogs on their own website, newsletter, or social media channels thinking they are protected as long as they credit or link back to the original source. In reality, this practice may open your business up to fines or other legal action.

5. Failing to Create a Shareholders’ Agreement

Any business that has more than one shareholder should consult an attorney to draft a shareholders’ agreement. Even though it may not be a legal requirement, a shareholders’ agreement will serve to outline how shareholders will interact with one another and provide a method for resolving any disputes that may arise. Most shareholders’ agreements contain separate sections detailing the parties to the agreement, the goals of the agreement, the obligations of the parties, and other aspects of the relationship.

The day-to-day concerns of operating a business often push legal considerations far down on the list of priorities; however, the best time to consult a small business attorney and protect your business is sooner rather than later. Identifying legal issues early on can prevent potentially irreparable damage to your business and reputation.

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Patrick Watt

Patrick Watt was a legal officer with an MBA degree and years of experience with various companies. He is now a full-time writer in law and business dispute niche. He writes for Carter Capner Law, a progressive, innovative and strongly motivated law firm based in Queensland, Australia.


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  1. WhereI live we’re fortunate to have a small business development group with the county that helps guide people looking to start a business.

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