5 Common Legal Mistakes Business Owners Make (and How to Avoid Them)

Friday, May 8, 2015

As you start a company, you may not be concerned about legal issues. Especially if you run a small operation, you could be under the assumption that legal problems only arise for large corporations. The truth is, any business — large or small — can become susceptible to lawsuits or other legal snags if the proper precautions are not taken.

Make sure to avoid these common legal mistakes that business owners make:

1. Not incorporating the business.

It's entirely too common for entrepreneurs to neglect establishing the correct legal structure — or any legal structure at all — for their business. This could open you up to personal liability on behalf of your business if you get sued by a customer or employee. Plus, if you pursue outside investment or financial support (think: business loans) for your company, the fact that your business is legally illegitimate will be a big problem. Talk to your attorney and business accountant about the best legal structure for your business.

2. Not drafting a shareholders' agreement.

When there is a shift in company structure — for example, when a shareholder leaves or the business goes up for sale — the lack of a shareholders' agreement will cause complete chaos. Make sure to have an attorney draft a legal document that outlines expectations.

3. Not outlining human resource guidelines.

If you hire a single worker for your company — part-time, full-time, contract, or otherwise — you need employee manuals to guide the code of conduct on your team. Companies have gone bankrupt due to lawsuits filed from former or current employees. Don't wait to seek the advice of an HR professional to build policies that fit your company's culture and expectations.

4. Not protecting intellectual property.

Until you file for a patent, copyright, or trademark, you leave an open opportunity for others to steal your work. This can cause a very messy, and often futile, legal battle. Have an attorney conduct an inventory of the company's intellectual property to make sure you're protected.

5. Not remitting sales or payroll tax.

As a small business, you are legally required to collect sales and payroll taxes. If you fail to remit the funds to government agencies, you'll have your business shut down. This is a very serious offense. Set up a separate bank account for the collection of sales taxes, and use a payroll service to automatically remit employer and employee taxes.

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