Legal Mistakes Business Owners Make

Written by Wesley Henderson

June 18, 2022

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Starting up a business can have a lot of costs, and many entrepreneurs might try and start without asking for legal help, and instead download a DIY form from the internet. Business owners can lose a lot of money taking that route. Don’t lose money on an avoidable legal mistake.

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Choosing the wrong entity, forgetting about taxes, not creating a business plan, not documenting agreements are common legal mistakes.

Choosing the Wrong Business Entity

When starting a business, you need to make sure you pick the right business entity that would best protect you from personal liability and negative tax consequences.
There are many to choose from with different advantages and disadvantages.

We recommend using an LLC to avoid this legal mistake. The sole proprietor and most partnerships do not provide liability protection.

The wrong action here is doing nothing and ending up a sole proprietor with personal assets at risk.
Learn more about problems with sole proprietorship here.

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Register your business with an LLC today and protect your personal assets!

Forgetting about Taxes

You gotta pay them. Many entrepreneurs forget about this during their first year. We recommend that you set aside 25% of any money you pay yourself
to make sure you have enough to pay taxes. As you grow, we recommend utilizing an accountant to strategize. This is less of a legal mistake and more of a financial one but either way it can cost you.

Failing to Develop a Business and Marketing Plan

Most articles you read on starting up a business include developing a plan because it is essential to the success of your company.
Here, it’s just that you need to think your business through enough to make sure it makes sense to be profitable. Even a simple plan is enough to get you start, but don’t neglect to paper it. The process will make you think through some of the challenges.

Handshake Deals with Partners

With our law firm, we (unfortunately) see the ugly side of business partnerships from time to time. Much of this can be avoided though by thinking through things like what happens if someone wants to leave, what are the voting rules, who owns what percent of the company, and more. You can download an effective and simple one here that will address these issues.

Not Documenting Agreements with Clients

It is crucial to document all agreements made, including with your partner, so that you do not have to determine what you agreed upon down the line and likely have a disagreement on what you shook on. This can cause legal fees that you would not have to pay if you just wrote an agreement that listed the parties, their obligations, resolution of disputes, and how the contract can be terminated.

The same goes for contracts with vendors, suppliers, and customers. You can save yourself time and litigation costs if you make agreements with third parties.

Don’t make this legal mistake – Download the legal documents you need from Drafted Legal templates

Conflicting with Employment Laws

Misclassifying team members as employees or independent contractors can cause conflict with worker’s compensation laws, along with owing more taxes. If you’re not sure what category your team members should be in, talk to an attorney to avoid future costs that could arise.

Employees vs Independent Contractors – Employees would be on your company’s payroll, and you would also have to deduct taxes from their paychecks. They can also get benefits like insurance or a 401k. Independent contractors are independent from the business and are usually hired to work on a project. Using contractors instead of employees can limit your liability, but some business experts agree that contractors don’t provide loyalty like employees do because they do not get benefits. Depending on your business and preferences, you should determine if having employees or independent contractors would be best.

TimeKeeping – Using a tracking system of employees’ hours can ensure they get paid fairly for their work and incentivizes them to clock in and out diligently to avoid missed punches or overtime.

Overtime Rules – These are different per state, so make sure you understand the regulations and follow them accordingly.

Starting a Competing Business while Still Employed

This legal mistake can put you at risk of a lawsuit with your competing employer if you are not careful and don’t protect yourself from litigation. Look at your employment agreement for a non-compete provision, and if there is one, talk to an attorney so that you can start your business in a way that it doesn’t violate those provisions. It’s strongly recommended that you buy insurance to mitigate losses if you are sued so that you don’t risk losing your business.

Infringing on IP and/or Not Protecting Yours

Intellectual property (IP) can include trademarks, patents, copyright, database rights, designs, and confidential information. A common legal mistake business owners make is hiring copywriters or designers without ensuring that they will own the content when they finish it, so make sure you talk to an attorney to protect your intellectual property and maximize potential value. Start by researching your trademark name at the United States Patent and Trademark Office. Or, download our guide for a more thorough explanation of how to research.

Lack of Proper Insurance Coverage for Various Aspects of Your Business

There are many types of insurance you could use for your business depending on the type. There is casualty insurance liability in the off chance someone falls on your premises, or products liability if you are selling a physical product and it causes harm to the buyer.
Excess liability coverages can be used for small businesses; other types specific to your company can be found if you consult with an insurance agent and find what would suit yous best.

If you have a high risk business like health or fitness, you should consider getting insurance. Basically, if someone can get injured and potentially sue you for an injury, then insurance is a worthy consideration. Insurance typically not only pays the settlement but also pay the lawyer to defend you.

Failing to Get Relevant Licenses and Permits

Depending on the business you want to run, there might be certain requirements regarding permits and licenses.

Seller’s Permit – If you are selling products, you will need this to be legally allowed to.

Food service License – If you are selling food, this is legally required.

Liquor License – Businesses that sell beer and wine must have a liquor license. If you are selling hard alcohol, you will need a different license to be permitted to sell that.

General Business License – A majority of States require businesses to have a license to operate.

Being a Jerk

Ok, this one isn’t really legal but it is true. Some people have a way of avoiding disputes and it’s usually a combination of working hard, following through with promises, and not being a jerk.

Treat people right and fairly and you will avoid a great deal of headaches.

Common Legal Mistakes Video

Wesley Henderson

Hi, I'm Wesley! A business attorney turned entrepreneur devoted to simplifying how you protect your business and your assets. Like you, I'm an business owner so I get it and I started Drafted Legal to help you put in place simple and sound legal strategies so you can focus on your business and not worry about getting lost in legal nuances.

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