There are lots of business booby-traps that you need to avoid as a start up. Among the biggest are legal mistakes that can cost you a lot of money. Small Business Trends contacted Paul Kassabian, Legal Product Counsel at LegalZoom to get a list of 10 legal mistakes every startup should avoid making.
He started by stressing a thoughtful approach.
“When forming a business, it’s easy to get caught up in the excitement of getting things up and running. However, failing to take the appropriate legal steps can set a company off on the wrong foot,” he wrote in an email.
Startup Legal Issues to Avoid
Not Establishing Your Business Properly
This is one of the most common blunders that costs. By forming a limited liability company (LLC), corporation (INC) or a sole proprietorship, small business owners keep their businesses in the right tax category. This is a great way to protect your personal assets from any liabilities your business might suffer. Further, separate bank accounts keep everything in separate financial lanes around tax time.
“The last thing someone wants to do is search back three months in their past transactions to determine whether something was a business expense or a personal purchase,” Kassabian writes.
Not Looking After Your Intellectual Property
In a word, looking after your intellectual property means having control over the ownership of the goods and services you sell. You should know the different kinds — copyrights, trade secrets patents and trademarks.
If you miss this important aspect of your business formula, you may lose or give up some of your success. Learn more here.
Not Providing Contracts for Employees
Without these, you’re leaving yourself open to legal action from disgruntled ex-employees and disputes from current ones. Salary, working hours and other details need to be clearly laid out.
Not Getting Things in Writing
A handshake deal won’t protect your small business when problems arise. The terms of every deal and who has what responsibilities needs to be penned. A good lawyer should be on your team to guide you through this.
Not Filing Taxes or Other Documents on Time
Small business owners are always busy chasing profits and putting out business fires. Kassabian says that as a result, they often file tax returns and other important documents late. That leaves them open to federal and state fines. Getting the proper legal and tax advice from the beginning is the remedy here.
He also points out that most of the documentation needed can be found online.
These are essential to steer clear of legal issues for web startups. Basically, this is a written contract between your small business and the folks using your website. It’s another buffer designed to protect you from legal claims.
Here’s a template to check out.
“Maybe the most important mistake entrepreneurs should avoid is waiting for an issue to arise before consulting with a legal advisor,” Kassabian writes. “Signing contracts, hiring vendors and employees – these are all matters that need to be done within specific legal guidelines.”
He stresses that this kind of preventative care is as important for a small business as for your personal health.
Not Having Clear Guidelines
Kassabian warns against taking shortcuts like not having an employee handbook as a bulwark against liable claims.
“Taking shortcuts when forming a business can seem like the easiest or fastest solution in the moment, but it can also put business owners in a number of dangerous situations. Paperwork often feels daunting, but taking time to do things the right way saves businesses from major headaches down the road.”
Not Having Non-Disclosure Agreements in Place
These work to protect your intellectual property. They are the best legal umbrella to use if you need to talk business to folks outside your organization. These should cover trade secrets, financial data and any other data that keeps your business moving forward.
Under an NDA, you’re free to share confidential information that helps your business. Without one, that same info can be used or sold to competitors.
There are dire consequences for not having an NDA.
“A dispute with no written agreement to fall back on can result in substantial legal fees,” Kassabian points out.
Not Keeping Business and Personal Finances Apart
He also says that mixing personal and business assets can leave a small business owner responsible for business debts or claims against the company. It can all be as simple as getting a business credit card or business line of credit.
Kassabian supplies some final advice:
“If you’re deciding to take the plunge and start a company, it’s important to take a step back and make sure you’ve taken the necessary legal steps to ensure your dream is protected. If you plan well, you will spend less time on legal problems and more time getting back to what you do best—running your business.”
Photo via Shutterstock
I have seen No 1 hit people a number of times where they have used the wrong structure for their new venture and it then comes back to bite them in several years time when they decide to sell, take in new partners or branch off into different areas. It makes good business sense to get legal advice up front before you actually start trading. Thanks for the article.
Thanks for the comment Mike. Due diligence is important.
Thanks for the list. It is a must for businesses to review this before they even launch.
Forming a Company is really a big excitement for startups but they must take care of the legal aspect of forming and growing a company. You have pointed out some great tips here. Awesome Post.
This is such good advice. I’d like to add “making sure you have insurance to cover employee legal claims”. I was taken to an Employment tribunal by a former Employee once just after I’d started my business. I won my case despite these cases usually going in the Employee’s favour. Fortunately, I had insurance to cover my legal costs and won because I had the services of a Barrister. The disgruntled Employee was just trying to make some money out of me and it was money my small business couldn’t afford at the time. Not having insurance would have closed my business down as the Ex-Employee who’d only worked for me for a year as a casual worker, expected her salary to be paid until she got around to finding another job. I had two months of sleepless nights but still had a business at the end of it.
Thanks Alison. Everyone take note. Glad things worked out for you.
Fantastic tips. Well worth it.
Thank you for all your efforts to help and see others succeed.