5 Legal Mistakes Small Businesses Make

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Building a successful small business presents many challenges for its owners.

Raising sufficient capital to fund operations, negotiating leases, hiring staff and other pressing matters rarely leave time to sit down with a business law attorney to go over the laws and legal issues affecting a business until a problem arises.

What they do not realize is that a consultation with a lawyer early in the formation of an enterprise may avoid or minimize problems later on

Some business owners believe they can handle keeping their businesses in compliance with the laws in their state without incurring the expense of hiring a lawyer, but such a do-it-yourself approach can be a serious mistake for a business owner.

Here are five of the most common legal mistakes small businesses make that could be avoided by getting professional advice early on.


Choosing the wrong business entity

The legal structure chosen for an enterprise may have significant consequences for you and your business operations.

Choosing the right business entity may protect your personal assets against liability for business debts and obligations, facilitate obtaining business credit, make it easier to expand and grow, and offer tax advantages.

State law governs the types of business structures available to you, but the four most common ones include:

  •  Sole proprietorship: This is the simplest business structure to form and the easiest to operate because it involves one owner or an owner and spouse. A sole proprietor can be held personally responsible for debts and financial obligations of the business, which places your personal assets at risk. Business income is reported on the personal tax return of the owner instead of as income of the business.
  •   Partnership: Two or more people coming together to engage in a business enterprise and sharing profits and losses is a partnership. Several types of partnerships exist and may offer owners some protection from the debts and obligations of the business.
  •  Corporation: A corporation is a legal entity that can sue or be sued in its own name. It operates independently from its owners, who are known as “shareholders.” The shareholders cannot, as a general rule, be held liable for debts or legal obligations of the business, so it offers more protection from personal liability than either partnerships or sole proprietorships. The corporation, as opposed to the shareholders, reports business income and pays taxes, but the corporate structure offers the flexibility to be a Subchapter S corporation to provide significant tax advantages to its owners.
  • Limited liability company: Similar to a corporation in offering its owners protection against personal liability, a limited liability company has “members” as its owners rather than shareholders. As with a corporation, an LLC may offer tax advantages to its owners.

A consultation with a business law attorney, such as those at Herrig & Vogt, offers the opportunity to explore the needs and goals of a business to determine the most appropriate business structure for it.


Conducting business without written contracts and agreements

Verbal agreements made over a cup of coffee and sealed with a handshake can be legally binding contracts, but they can be difficult to enforce.

Enforcement of a contract when a party refuses to fulfill its obligations or disputes the terms of the agreement usually ends up in court with a judge being asked to resolve the dispute.

A written contract with the signature of each of the parties is powerful evidence of its terms that can sway a judge to rule in your favor.

It avoids the uncertainty of two parties offering testimony containing conflicting recollections of a transaction and hoping a judge believes your side of the story.


Failing to understand and to stay current with the law that applies to your business

Complying with and remaining up to date with the latest laws covering taxes; employment; protection of patents, trademarks, and other forms of proprietary property; and other legal matters can be a full-time job for business owners.

For example, a local retailer decides to expand its market by offering merchandise for sale on its website. Suddenly, the small business owner must learn and comply with a regulatory landscape that includes compliance with laws in multiple states as well as federal laws.

This is when a business owner needs to rely on the knowledge and experience of a business lawyer for advice and guidance.


Failing to plan for the death or disability of an owner

Small business owners usually have an active, hands-on involvement in their daily operations. Loss of the services of an owner through illness, disability, or death can have a devastating effect on a business.

An attorney can help you establish an orderly plan for dealing with a short-term or long-term absence of an owner.

The death, retirement, or disability of an owner could make it impossible for the remaining owners to take up the slack to continue operations. An orderly plan may include insurance policies to fund a buyout of an owner or the interests of the heirs of a deceased owner.


Delaying a consultation with a lawyer until problems arise

Consulting with a business law attorney ensures that your small business maintains records to document its operations, obtains all of the licenses and permits required to operate, files the proper paperwork with regulatory authorities, and remains in good standing and in compliance with federal, state, and local laws.

A lawyer anticipates issues and offers solutions before they become major problems to allow you to focus on running your business.


Author’s Bio:  Steve has been writing legal-centric articles for several years now.

He started working with the personal injury attorney law firm Herrig & Vogt in 2019 as the Content Marketing Manager, which has allowed him to expand on his writing in personal injury, family law, and much more.

Steve strives to offer the public advice on various laws covering a variety of practices.

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