Law is a two-edged sword ― it can advance your business and at the same time be the reason you are not in business the next day.
“It is important to know laws protecting your employees’ rights to guard yourself against lawsuits that could have been prevented,” The Barnes Firm attorneys advised employers.
Below are ten legal mistakes every business owner should avoid:
1. Failure to create a business entity
For any business, it is important to decide its entity. Is it a sole-proprietorship, Limited Liability Company (LLC) or partnership? All of these business forms have a risk of their own, however, the riskiest of them all is the sole proprietorship.
Small businesses usually opt for this form since it saves the stress and cost of registration.
Even though this is true, it exposes the owner to a lot of risks. Incase things go wrong with a sole proprietorship business, the owner’s asset is not protected.
The case is different for LLCs. The business in this case is seen as an entity separate from the owner’s assets. When sued, for instance, only the business is liable and not its owner.
Some tax benefits can also be explored in business entities. A good business lawyer can help you navigate this appropriately for possible tax avoidance.
2. Ignoring employment agreement
New businesses make the mistake of hiring by verbal contract. This can hurt both parties ― you, the employer and the employee.
It is advisable to have a written contract with all details well spelt out. It is also important to note employees’ responsibilities and class in the contract. For instance, W2 employees are different from 1099 contractors. W2 employees are payroll workers while 1099 are not.
You are responsible for covering the taxes of W2 employees while the 1099 employees are responsible for their taxes.
Putting an arbitration clause in the contract can also save you from legal suit in case of conflict. Also, to protect your company’s intellectual property, make sure to include a Non-Disclosure Agreement in the contract.
3. Not seeking legal counsel advice before signing contracts
It is better to seek legal counsel before pending your signature on contracts. Although the cost of hiring a lawyer might be expensive at this point, fighting a legal battle costs more.
According to the Small Business Research Summary, advocacy for small businesses in government estimated that legal costs for actual litigation ranged from $3,000 to $150,000.
Some of these suits arise from contracts signed without a full grasp of their interpretation. It is alright to raise funds from friends, angels, venture capitalists or using loans; things can go sore if your investment documents fail to comply with securities law during the process.
4. Unclarified ownership agreement
If you are starting with co-founders, all parties must agree on the details of ownership and responsibility. Don’t be scared to bring up the matter for discussion and have a lawyer draft a binding agreement.
For once, forget you are getting into business with your friend. Sorting this from the start prevents future actions that could jeopardize the business.
In the ownership agreement, determine the equity each person is getting, the basis for the equity and the roles and responsibility of each co-founder.
Do not forget to include clauses that cater for when a co-founder decides to leave. Some business owners usually include vesting schedules such that a certain percentage of the equity is only assigned after a duration of time in the company.
The same applies if you intend to give employees a certain amount of the company.
5. Company/brand name
When deciding the name for your company, always double-check it is indeed available for use. Sometimes, such names may have been trademarked or already in use by another company.
Even when it is not trademarked or in use by another company, check the domain availability. Well, if you can afford to pay the cost of buying the domain if it has already been taken, you can proceed. But to reduce business costs, coming up with a name that has not been taken by someone else is better.
Avoid picking a name that does not relate to your business. Some small businesses in their search for unique names may use foreign languages. Make sure the actual meaning of the name is not negative, because this may cost you in future especially if the company intends to expand internationally.
If possible, trademark your brand name to prevent competitors from profiting off it.