There are many entrepreneurs who find it really difficult to start a business and understand the multitude of legal issues that arise. Often times, legal issues are overlooked at the start of a business. But later, they realize that things which do not seem important, initially, could cause small business failure in years to come.
Therefore, entrepreneurs should plan to avoid the most common pitfalls right from the time of planning a business idea to its execution. Here is a look at five common legal mistakes that many small business owners make, along with practical ways to avoid them.
Mistake #1: ‘Hand shake deals’ with vendors and clients.
A number of small business owners tend to make handshake deals with vendors and clients. But they should be careful because things do not take much time to go wrong. In the future, you and your client may have differing approaches, perspectives and opinions. To preclude possible future headaches, the best thing you can do is keep a written copy of each contract with you and your vendor. This will help you protect yourself from a loss of money and time due to potential lawsuits.
Mistake #2: Select an inappropriate business structure.
Whether you start a limited liability company (LLC), an S-Corp or a sole proprietorship, you might put your business at risk by making a hurried entity selection. Entrepreneurs who choose to form a sole proprietorship do not have to register their business with the state and they usually operate their startup on a shoestring. But, you must be careful since there is no “wall” between personal and business assets and liabilities.
On the other hand, LLCs and S-Corps require more money to set up and maintain, but the business is considered to be legally separate from personal assets when managed correctly. Therefore, LLCs and other business entities offer less risk when compared to the sole proprietorship. If you are a sole proprietor, consider obtaining business insurance to protect personal assets, if the business is sued or face heavy losses. Meanwhile, it is good to consult with an accountant or a lawyer to choose the best structure for your business.
Mistake #3: Form a partnership without a detailed agreement.
No matter how much you trust on your new business partner, you should not move forward without a legally binding agreement (i.e., a partnership and/or operating agreement.). In order to avoid legal issues that could arise, put everything in writing including who has what authority, who owns shares, etc.
Mistake #4: Create a 50/50 partnership.
It seems like a good idea to establish a 50-50 partnership, but it could become difficult when it comes to bringing in new investors and a deadlock occurs when a major decision is at hand and no one budges an inch. In these types of situations, if the problem persists, one partner is often forced to buy the other out. However, if you really want to stay away from this type of legal mess, then you should consider a 51/49 split; enabling one partner to make critical decisions when the pressure is on.
Mistake #5: File for a trademark without doing your homework.
If you believe that you can file for a trademark with a hasty internet search or a quick glance at the U.S. Patent and Trademark Office (USPTO) database, think again. Make sure your research is conducted with the Patent and Trademark Office, as well as the state level since each state has its own registry. Consider gaining additional insights from business directories such as domain-name companies, YellowPages.com and the Canadian Intellectual Property Office.
Maria Anderson is a web development professional from Sparx IT Solutions. Maria follows her writing passion by writing blogs on Web design, web development & logo design topics based on online business.
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