8 COMMON LEGAL MISTAKES BY SMALL BUSINESS OWNERS
Small business owners often juggle multiple responsibilities which can leave them vulnerable to neglecting important protections for their business. They also may feel they don’t need or cannot afford legal help so they will handle legal matters themselves. Unfortunately, the DIY approach is difficult to manage when there are so many different areas that can raise legal concerns. The most common legal mistakes owners make include the following:
- Failing to understand and stay current on labor and employment laws. There are a myriad federal, state and local laws that apply in an employment setting. These include wage and hour regulations, health and safety requirements as well as hiring, firing and discrimination laws. Every year also brings new laws. Employers must comply with these laws, but they should also take various preventative steps. Written employment policies and training programs are a must to ensure employees are well-informed and to help protect employers from potential liability. In addition, employers may need written employment, confidentiality and noncompete agreements depending on the nature of the business.
- Not planning for disability or succession of the business. Many small business owners have a very active role in the day-to-day operations of their company. If something happens to them, it can be devastating to the business. As a result, it is imperative for owners to plan for short-term problems (i.e., temporary incapacity) as well long-term succession if the owner retires or dies. Owners need a plan for what they want to happen to the business and then implement the plan by executing legal documents such as a durable power of attorney, will, trusts, buy-sell agreements and various corporate documents. Without a plan, partners, employees and heirs may be left with a mess that can damage the value of the business.
- Using boilerplate contracts or no contract. A handshake is not a valid contract and can result in significant problems if there is a dispute. The same is true of “form” contracts that can be purchased online. These are generic contracts that may not be valid in your state and won’t address unique issues of the business or in the transaction.
- Failing to protect intellectual property. The business name, logo, processes, services or products may need to be protected with trademarks, patents or copyrights. An attorney should be consulted early on to ensure that any intellectual property rights are properly protected.
- Inadequate recordkeeping. Businesses need to maintain many different types of records including sales, tax, employee identification and immigration documents, payroll, wage and hour, insurance, corporate minutes, etc. Failure to have these records can carry significant penalties. In addition, this can impact an owner’s ability to get a loan or sell the business.
- Not obtaining necessary business licenses and permits. Some businesses require special licenses, permits, or insurance. For example, if the company sells products, it may be required to obtain an authorization to collect (and pay) sales tax in states where it operates or has a sales tax nexus.
- Choosing the wrong business entity. There are four basic choices when selecting a legal structure for the business: (1) Sole Proprietorship; (2) Partnership; (3) Limited Liability Company (“LLC”); or (4) Corporation. There are benefits and drawbacks to each one, including varying tax consequences and personal liability. An attorney and accountant can assist in selecting the right one.
- Not filing and paying taxes. Tax laws are complex and change frequently. In addition, many small business owners struggle with cash flow. Whether because of a lack of understanding or an inability to pay, businesses may fall behind on taxes, which can have significant consequences including payment of additional penalties and interest, seizure of personal and business property and even criminal liability. Sales tax has become a particular problem as many online businesses have suddenly found that they may have to pay tax in multiple states due to changing sales tax laws.
Lawyers can help owners avoid legal problems as well as mitigate the damage after the fact. You may think it is a simple matter to handle and you will save a little money doing it yourself, but more likely you will make mistakes that will cost you far more than the legal fees.
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If you are a small business owner, contact us for a legal checkup to protect your business.