9 Legal Missteps That Can Sink Your New Business

Starting a business requires paying attention to numerous details, including many that have legal significance. But when entrepreneurs have so much to juggle and stay aware of, slip-ups can happen.

The list of potential missteps is long. I am sharing several of those mistakes to give you a feel for what could set you up for some major headaches and hassles.

1. Choosing the wrong business entity type

The legal structure of a business affects the degree of personal liability protection its owners will have. If a business is operated as a sole proprietorship or general partnership, it is not considered a separate legal entity from its owner(s). Therefore, if the business is sued or runs into financial problems, its owners' personal assets could become fair game as restitution. By forming an LLC (Limited Liability Company) or incorporating, however, the business is its own legal entity, independent of its owners, so owners have less personal liability risk.

2. Incorporating or forming an LLC in the wrong state

Business owners sometimes set up shop in a state (other than the one they’re located in) because of the lure of lower tax rates. While sometimes that might offer a financial advantage, the filing fees and administrative headaches may end up costing the business more in the long run.

3. Not checking to see if your business name is available to use

Using a business name before checking to see if it’s already in use by another company could also create legal problems for you. If a business name has already been registered with your state by another company, the state will likely not allow another business that offers similar products or services to use the same name. And if a business has a registered trademark on its name, that name is protected across all 50 states.

There are free online name search tools (like the one we provide at CorpNet) that you can use to see if a name is already in use, and you can also verify availability by checking with your state’s filing office and the United States Patent and Trademark Office website.

4. Neglecting to obtain required licenses and permits

Depending on the type of business and where it’s located, various federal, state, and/or local licenses and permits might be required to operate legally. Do your homework by checking with your state, county, and local municipality to learn what the requirements are for your business. Otherwise, you might face fines, penalties, or even suspension or closure of your company.

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5. Failure to open a separate business bank account and credit card

LLCs and corporations are required to keep their finances separate from those of their owners. Failure to do so can result in owners losing the personal liability protection that those business entity types offer. Even though it may not be mandatory for them, owners of sole proprietorships and partnerships should also consider having separate checking accounts and credit cards for their businesses. This helps prevent blurring the line between personal and business income and expenses— something that can help immensely if ever the IRS decides to take a closer look at your tax returns.

6. Not educating yourself about laws and regulations related to hiring and managing employees

Businesses that plan to have employees need to be aware of the federal laws that protect workers’ rights, such as the Fair Labor Standards Act, federal discrimination laws, and OSHA. States also have their own laws and requirements for employers—for example, state discrimination rules, workers' compensation insurance, unemployment taxes, disability insurance. Also, counties and cities might have rules applicable to employers in their jurisdictions. Before hiring employees, investigate the requirements and consider getting insights from professionals, such as a human resources professional, accountant, and business attorney.

7. Not researching what ongoing business compliance requirements apply to you

Not only does a business need to start off on the right legal foot, but it also needs to stay that way! Make sure you understand the ongoing compliance obligations (and their deadlines) that will apply to your business. The requirements will vary according to your business entity type, business location, type of business activities conducted, and more. Some examples of possible compliance tasks include:

Filing annual reports with the state
Filing taxes
Renewing licenses and permits
Updating the state about major changes to your LLC or corporation (such as new members, members leaving, change in board members, etc.)

Compliance is a big deal because if neglected (even unintentionally) it could result in fines, lawsuits, or even suspension or administrative dissolution of a business.

8. Assuming you can handle it all on your own

Understanding a business’s legal requirements can be confusing, so I encourage you to consult an attorney for guidance on what you need to pay attention to. That expertise can help you steer clear of unknowingly putting your company at business risk of liability issues.

9. Paying more than necessary when filing your paperwork

Filing your business formation documentation must be done accurately and on time. But many entrepreneurs make the mistake of paying lawyers to handle it, when they could save money and time by enlisting the help of an online business document filing service instead.

The best way to stay in step

Besides the points I’ve mentioned in this post, there are many other mistakes businesses make that put them in legal jeopardy. Be an aware and action-oriented entrepreneur so you don’t find yourself taking the same missteps. The best defense is a good offense—understand the requirements and comply with them from the start.

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