5 Common Small Business Legal Mistakes to Watch Out For

by Kathryn Hawkins

2 min read

You’re an entrepreneur, not a lawyer. Still, you’ll need to take care that you’re doing everything by the book when it comes to your business, or you could risk hefty penalty fees, or potentially even jail time for the worst offenses. Here are five common legal mistakes to avoid.

1)   Failing to incorporate your business – If you’re operating on your own, it may seem inconvenient to bother with all the documents of incorporation. But in fact, formalizing a business structure can offer significant legal protection: In the event of a lawsuit, all of your personal assets could be at stake if you haven’t taken the proper measures to protect them. Take a look at our previous article to find out which organization structure is right for your needs.

2)   Paying employees as contractors or paying under the table – It can be a hassle to cover payroll expenses like Social Security and disability insurance for employees, but they’re all a necessary evil. If you try to get around these costs by hiring full-time employees and paying them as contractors, or simply paying them “under the table” in cash that goes unreported, you’ll likely find yourself in trouble with the IRS sooner or later. Check out our tips on when to categorize a worker as an employee or a contractor, and make sure that both your business and your workers are reporting all payments made.

3)   Violating other business’ trademarks – If you didn’t perform your due diligence in coming up with your business’ name and taglines, watch out: If an established business with a similar name or trademark believes that you’re infringing on their intellectual property, you could be face the receipt of a “cease and desist” letter, or worse, a lawsuit. If that happens, you’ll likely need to rebrand your company, and may be forced to give up your website domain and valuable backlinks. If you haven’t formally launched your business yet, check in with the U.S. Patent and Trademark Office to ensure that your desired name is available, and register your trademark.

4)   Neglecting to formalize contracts – A “handshake deal” might have been good enough back in grandpa’s day, but in these times, litigation is all too common, and business owners need to protect themselves. Work with a lawyer to draft standardized contracts for clients and vendors, stating the terms of your agreement and penalties for not following the proper protocol. If you must sign another party’s agreement, have your lawyer look over it first to make sure all of the terms are favorable to you. If not, request the necessary modifications.

5)   Not planning your business’ transition – Many successful business owners want to keep working until they drop. But what happens then? If you haven’t created an estate plan that leaves proper instructions for transitioning ownership of the business, your family may not be equipped to handle your company and it could lose value quickly. Be sure to talk with family members and business partners about your plans for the company’s future after you’re no longer able to run it, and formalize your decision with the help of an estate attorney.

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