The 5 Biggest Legal Mistakes Small Business Owners Make
A startup launched with the best of intentions can quickly hit rough seas if you don’t handle legal issues the right way. Here are the five most common—and most deadly—legal mistakes small business owners make.
- Choosing the wrong form of business. If you’re a one-person business, you may think you don’t need the additional complications of forming a corporation or LLC. For even the smallest business, however, incorporating or forming an LLC protects your personal assets against creditors, so the cost and time can be worthwhile. The form of business you choose will also affect how easy it is to raise capital later on, whom you can solicit investments from and more, so it’s important to not only consult a lawyer, but also take your long-term goals into account before making the decision.
- Not putting a partnership agreement in writing. If you start a business with a friend, spouse or co-worker, you may think there’s no need for a written agreement. No matter how close you are now, you never know when a partnership can go bad, and putting the terms of your partnership in writing will not only help protect you in the event of a falling-out, but also make it easier to value and sell your company should you decide to exit. Your partnership agreement should cover the percentage of ownership each person has, what they contributed (money, assets, sweat equity) to obtain that percentage, each person’s title/role in the business, how decisions will be made and what happens if a founder wants to leave the business.
- Failing to trademark your business name and logo. Before selecting your business name, search online, do a search with the U.S. Patent and Trademark Office, and check with your state’s business filing office to see if anyone else is using the names you have in mind. Once you choose a name and develop a logo, trademark them to protect yourself. Otherwise, you could pour hundreds of thousands of dollars into developing your brand, only to have someone else steal it from you (or claim you stole it from them). Even if you “win” such a lawsuit, the costs of defending yourself could put you out of business.
- Working with vendors or clients without a contract in place. In the excitement of starting a business or landing a big customer, it’s easy to get ahead of yourself and jump right into starting the project or manufacturing the goods on a handshake. Always protect yourself by using a contract. Develop a few standard contracts you can adjust to fit the situations your business is likely to encounter. A lawyer can help you create these contracts, then quickly review any that you have questions about signing; this will cut down your costs compared to creating new contracts from scratch each time, but still provide protection. When hiring freelancers or independent contractors, use a contract that ensures your company retains the rights to their work and clarifies their independent status.
- Being too cheap to seek legal advice. Never is the saying “penny-wise and pound-foolish” more true than when it comes to legal advice. Trying to save money upfront by doing it yourself can cost you a ton in the long run. Your local Small Business Development Center (SBDC) or SCORE office can provide basic legal advice and refer you to local attorneys who can help further. (Disclosure: both are clients of my company.) Don’t be afraid to ask lawyers about ways to cut costs, such as paying per-service rather than per-hour or having paralegals handle some of the work.
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