Small businesses make legal mistakes all the time—some of which can be disastrous. But knowing what pitfalls to watch out for can make all the difference. Below are some of the most common.
Not Having Good Written Agreements
All of your important business agreements must be in writing. Oral agreements are usually not enforceable, and leave you with no recourse for compensation or legal action. Make sure your contracts are well thought out, drafted in your favor and give you flexibility and protection. Read Where Can I Find Sample Business Contracts? for a wealth of contract resources, including templates.
Unclear Expectations and Rules for Employees
It’s important to set clear expectations and rules for your employees. Make sure they acknowledge they are “at will” employees, which means they can quit or be terminated at any time without exposing your business to liability. It’s also important to inform your employees that discrimination, sexual harassment and other illegal acts will not be tolerated. Read Does an HR Manual Have to Be in Writing? to get some direction on setting forth your guidelines and expectations.
Not Getting an Experienced Corporate Attorney
Every growing business faces issues that require the services of an experienced attorney. Issues such as stock-option plans, employee negotiations, state and federal tax rates and intellectual property rights all require a corporate lawyer experienced in representing start-up and emerging companies. And though such attorneys charge more than generalists do, the money you spend on experience will save you time, aggravation and money in the long run.
Ignorance of the Law
Just because laws are numerous and complex doesn’t mean your business can ignore them. Learning a little about the following basic areas of the law can keep you out of legal hot water:
Major employer-employee laws
Securities laws affecting how you can raise capital for your business
Governmental regulation of your industry.
Not Keeping Proper Corporate Records
Improper record keeping can cause problems with the IRS, hamper your ability to raise equity capital and could result in personal liability. And yet, small businesses are notorious for failing to keep the records required for incorporation. Failure to document meetings of the Board of Directors and shareholders, failure to record stock issuances and failure to document stock transfers are common infractions of the guidelines that protect the status of corporations.
Not Clearly Documenting Partners’ Rights and Responsibilities
Founding shareholders or partners should have an agreement that answers the following questions:
How much capital will each person contribute?
What happens if the business needs more capital?
What happens if one person leaves the business?
What happens if one person dies?
Will the stock or partnership interest be bought back from the estate of the deceased or from the person leaving the business?
Starting the Business as a General Partnership Instead of a Limited Liability Entity
Under many states’ laws, the partners are jointly liable for the debts and obligations in general partnerships. If the business encounters a problem, all of your investment in the business—as well as all of your personal assets—is at risk. There are other legal options that avoid liability—corporations, LLCs and limited partnerships, for example.
Getting Involved in Litigation
Litigation fees can be astronomical, and they can quickly drain management time and resources. Consider alternative means of dispute resolution, such as mediation or arbitration. Or, if a reasonable settlement offer is available, think seriously about taking it instead of spending more time in litigation.
Ignoring Intellectual Property Issues
Even low-technology companies have intellectual property issues that may be important for the future success of the business. For example, do you require your employees and consultants to sign Confidentiality and Invention Assignment Agreements? Have you registered for a trademark for an important company logo or product? Do you put copyright notices on your written information? Are your trade secrets adequately protected?