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BFS Capital Blog

Legal Mistakes Small Business Owners Should Avoid

June 9, 2015

A business owner has a long list of priorities. At times, the legal issues a business faces may end up at the bottom of that list inadvertently. However, it’s important to protect yourself and your business from legal mistakes. Otherwise, you could end up in a lot of legal trouble, or worse – broke. Here are some common legal mistakes that small business owners should avoid.

No Business Entity

Establishing a legal structure for your company is imperative. There are tax and legal implications for your business that depend on the way you want to run your business – as a Sole Proprietorship, Limited Liability Company (LLC), or another business structure. Failing to decide your business entity before your business gets going can open you up for personal liability. It may even impact your potential to get business funding from certain lenders. Not creating a legal business entity may lead to issues with what happens to a co-founder’s shares in the business if they decide to leave, and could impact legal procedures if a customer or employee sues your business. Not having the right legal structure in place can end up costing you and your business a fortune.

No Business Plan

Most businesses start up because someone has an idea. If you’re lucky, it’s a revolutionary business idea and there is, without a doubt, a gap in the market that needs to be filled. Oftentimes, the excitement and anticipation of formulating an idea into a business outshines the thought of creating an actual business plan. If you’re looking to receive traditional bank funding or attract equity investors, there needs to be a well-thought out and constructed plan, put down on paper that outlines:

    • What your product or service is
    • Who it will be serving
    • How it will be a benefit to consumers in the market
    • The time it will take for you to financially break even
    • How you plan to reach that point
    • And even what happens to the company if founders leave or die

No Buy-Sell Agreement

Also known as a buyout agreement, a buy-sell agreement is a legally binding contract between the co-owners of a business that establishes what would happen if a co-owner chooses to leave the business, is forced to leave the business, or dies. Essentially, it is somewhat of a premarital agreement between partners and shareholders. Without this in place, there may not be an effective way to settle disagreements or disputes down the road. With a buy-sell agreement, assets and ownership, for any and all situations, are clearly and fairly disposed.

No Security and Protection

While it’s also important to physically protect the property and employees of your business, another important aspect of a business that needs to be secured is the intellectual property and trade secrets. These are a business’ treasure chest. Patents protect ideas, trademarks protect words and phrases, copyrights protect creative expression, and trade secret laws protect commercial information that is not made public. It’s important for every business to determine its secrets and how to best protect them from competitors and the public.

No Human Resources Regulations

Not all small businesses have the ability to have and keep their own human resources department. However, this doesn’t mean the business should completely ignore what that department would do for the company. Human resource representatives are generally put in charge of hiring employeesfiring employees, and everything in between. While you may not want to think negatively about your current or future employees, you have to be able to protect yourself and your business in the case that an employee lashes out at you. Employers and employees need to have a set of guidelines on business conduct and ethics. Don’t risk the chance of going bankrupt because a former employee comes after you and sues your business.

If you’re not careful, legal mistakes might happen more often than not for your small business. It seems more difficult to actually protect yourself and your company because there are a lot of rules and small issues that can result in big consequences. Of course, these business tips are not intended to replace legal advice, so please consult a law firm or other legal professional before making important business decisions. With proper research and consulting a legal aid early on in the process, your small business may be able to avoid many of the common legal mistakes that business owners make.

Image courtesy of Stuart Miles /