Maybe you have decided to pursue a passion, or perhaps you see a need in your community for a service. Whatever the reason, starting a new business can be fun yet challenging. Avoid making common legal mistakes when you start your business to get it going quicker and better. From designing logos, to properly filing documents with the state, new business owners can quickly become overwhelmed and make mistakes. Here is a list of the top five mistakes that new business owners make and some helpful tips to help you avoid these common pitfalls.
1. Not Finding the Right Business Structure
Perhaps the worst of the very common legal mistakes is to not use an entity like an LLC (i.e. being a sole proprietor). Learn why being a sole proprietor is usually a very bad idea here.
Below is a quick guide but when in doubt we recommend using an LLC to start because it not only gives you the liability protection needed to protect your personal assets, but also has flexibility and less maintenance than other entity types. Here are the various types including an LLC:
Sole Proprietorships – This is the most basic business organization where a single individual owns the business. This structure allows you the most control over your business, but the owner has unlimited liability.
General Partnerships – This is an association of two or more parties carrying on as business co-owners for profit. This structure provides equal voting rights and simplified taxation, but unlimited personal liability exists.
LLCs – An LLC is a hybrid entity with characteristics of both a corporation & a general partnership and must be filed with the state. This structure allows for limited liability and will enable you to pass-through taxation to avoid corporate tax rates. However, there is not a lot of governance, and members cannot pay themselves wages.
Corporations – A corporation is a legal entity separate from its owners and is formed by filing documents with the state. This structure allows for personal liability protection and business security, but there are many formalities, and corporations face a higher level of taxation.
Each structure has its advantages and disadvantages, so it is important to choose one that best fits the goals of your business. Once you have decided on a business structure, you can complete the appropriate documentation. Most online businesses utilize LLCs.
2. Not having Copyrights
During the creation phase of your business, there are many decisions you must make, such as the name of your business, any logos, or any other designs. To protect yourself and your business, you should comply with federal copyright and patent guidelines. Not only will this ensure the safety of your business’s unique characteristics, but it will also ensure you are not inadvertently using the same name, design, or method as another company.
3. Not Having Contracts is a Common Legal Mistake
Agreements with clients, contractors, businesses, or anyone else. Here’s what’s important: making sure you are on the same page and very clear about the agreement. The reason is that sometimes the parties may have a different interpretation of what the deal really was. Having a simple, fair, and straightforward agreement will go a long way to prevent a relationship from deteriorating and also provide recourse to protect your business and make sure you can recover any money owed. Use them early and often.
4. Mixing Personal and Business Expenses
Another common mistake that new business owners make is mixing their personal and business expenses. There are typically many expenses that come with starting a new business, whether it be filing fees or start-up costs, so it can be very easy to commingle funds between your business and personal accounts. However, you should be wary of this for a number of reasons, including tax reasons and liability reasons (in fact, you can lose your LLC protections). Properly managing and tracking your business expenditures and keeping them separate from your personal expenses will make filing taxes simpler and records clearer.
Pro Tip: Get a business bank account with a separate EIN (link here) to make sure you keep everything separate.
5. Tax Considerations
Based on which business structure you implement, taxes may look different for each business. However, many new business owners fail to keep proper records and therefore tend to underpay their taxes. This can have severe repercussions, including financial penalties and inflation of your business’s end-of-year taxes. To avoid this, new business owners should develop a systematic way of keeping records so that the correct amount is paid, and the taxes are correctly filed.
Use Drafted Legal to avoid common legal mistakes above. Start by getting an LLC and the contracts you need!