By: Fisher Stone, P.C September 3, 2024

The Six Legal Mistakes That Too Many Small Businesses Make

#1 – Failing to Choose the Right Business Structure

Formally settling on a business structure is one of the first official things you do as a new business owner. And, although it is done early in the process of getting your business up and running, it will have significant, long-lasting consequences on the legal standing of your operation and what liabilities you may face moving forward.

Perhaps the most common situation of all is for a small business to be left as a sole proprietorship. That is the default structure of any business when someone simply starts operating and doesn’t do any formal paperwork or registration to create an entity. And while there are some situations where a sole proprietorship is just fine, that structure certainly isn’t right for all businesses.

The big problem with operating as a sole proprietor is that you are personally liable for the actions of the business. So, if the business runs into legal trouble in one way or another – even if that trouble isn’t necessarily your fault directly – your personal assets could be at risk. Things like savings, personal property, and more will be left unprotected in the case of legal action.

If anything about the way your business operates is going to open you up to potential legal issues, forming an LLC or corporation is a good first step. This will put a layer between your personal assets and those of the business, and while it doesn’t prevent legal action from occurring, it does limit your risk in that event. It’s a great idea to work with an attorney who can review your situation and recommend the best legal structure for the business.

#2 – Not Formalizing Agreements

Far too many businesses get into the habit of operating casually, without the help of contracts or formal agreements to make sure everyone is on the same page. This is often due to personal relationships – you don’t want it to seem like you don’t trust another party by asking them to sign a contract.

It’s important to understand that a contract is there to protect both parties and it doesn’t have anything to do with a lack of trust. In fact, both parties signing the contract indicates that they trust each other and want to work together in some capacity.

#3 – Calling Employees Independent Contractors

It is important to classify anyone who works for you properly when running a small business. Thanks to the connective power of the internet, using independent contractors for a variety of tasks has never been more popular, although it’s entirely possible to have in-person independent contractors, as well.

Hiring a contractor to work for you is appealing because you avoid many of the responsibilities and costs that come with hiring an employee. When you have a contractor, you just pay them the agreed-upon price for the job they are doing, and that’s that. They will have to deal with paying taxes on their own, and they take care of their own insurance, etc. From a business owner’s perspective, it’s an appealing arrangement to be sure.

The problem is that some businesses fall into the habit of treating people like employees even though they are paid like independent contractors. If someone works for you exclusively, and regularly, there is a good chance the law will see them as an employee rather than a contractor. Getting this wrong can lead to serious ramifications including penalties and the payment of back wages.

If you have any doubts about the status of people who work for you, take the time to talk to an attorney who works in this space and can provide you with a clear, confident answer. It’s absolutely fine – and desirable – to use independent contractors, but just make sure you are doing so in a way that lines up with legal protections for workers.

#4 – Leaving Intellectual Property Unprotected

It is expensive and time-consuming to develop valuable intellectual property. In fact, you might be developing valuable IP as we speak, even if you aren’t doing it purposefully. Something as simple as your brand name and logo can be intellectual property that holds significant value as you continue to serve customers or clients and build a solid reputation in your industry. If those assets aren’t protected, and someone else comes along and works to take advantage of them, you may lose out on potential business or even have your name tarnished.

Yes, it is worth the cost and time needed to protect whatever IP you have in your business. That means you might want to take steps like trademarking your business name, pursuing a patent if you developed something innovative, or protecting the processes that you use to serve your customers. There are countless different ways that you might need to protect your IP, so again, this is a place where working with a lawyer can go a long way toward reaching a good outcome.

#5 – Falling Short on Compliance

Let’s be honest – most business owners view compliance matters as little more than a headache. You probably just want to develop great products or services and find as many customers as possible to grow your company. Having to check the regulatory boxes feels like a headache that you just don’t need.

Whatever your feelings on compliance happen to be, this matter remains important regardless. There are many different categories that can be lumped together here, including zoning laws, health and safety standards, tax reporting, labor laws, and more. This is not a case where you should just act however you want and then plead ignorance and ask for forgiveness later – rather, you should take the time and effort to comply as fully as possible from the start so no issues come up to begin with. In the end, compliance usually ends up being a little easier than you expect, and once you check all of these boxes, you can get back to doing what you do best.

#6 – Being Vulnerable to Liabilities

There is nothing you can do about some of the potential liabilities that you face as the owner of a small business. Ultimately, there is a degree of risk involved with anything in life, and such is the case in business. If you are going to operate any type of business, you have to be okay with the fact that certain risks just come with the territory.

But that doesn’t mean you just run blindly into the fire and hope for the best. If you do a good job of understanding the liabilities that you face and then do what you can to either mitigate or eliminate them, you’ll be on a lot firmer footing than you were previously. This is something that many small business owners fail to do, whether it’s because they don’t understand the risks they face or they don’t want to spend the money needed to close up these potential vulnerabilities.

We’ve already talked about how you can limit these liabilities, such as through using the right business structure and by having contracts in place for as many working agreements as possible. Other ways to cut down on potential liabilities include paying close attention to all safety regulations in your industry, providing employees with all of the protections and rights that they have under the law, and more. In the long run, you will never regret spending some time and money to make sure your business is operating as responsibly as possible.

A Necessary Task

Ignoring the legal matters that impact your business will certainly not put you in a better position – you’ll simply be ignorant of the risks that exist until something comes along that stops you in your tracks. Being proactive is the way to go, working with a team like Fisher Stone to tackle any potential legal issues before they become big problems. All it takes is a phone call or message to get the ball rolling and put your small business in a solid position to grow and thrive.