Avoid These 7 Common Legal Mistakes

Common Legal Mistakes

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January 9, 2016

There are enough pitfalls and uncertainties for start-ups and small businesses, so as an entrepreneur the last thing you want is to fall foul of an easily-avoided legal error and have your new venture grind to a halt as lawyers exchange letters while waiting for a court date – Not least because the cost of litigation can be prohibitive both in terms of money and your time (time better spent running your business). Of course, there are alternative methods of resolving issues, such as arbitration or mediation, but far better to focus on prevention rather than cure. The following are the most common legal mistakes made by small and growing businesses.

1. Ignorance is no excuse.
Of course you’ll have a corporate lawyer to handle this for you and give you advice when you need it, but the responsibility for compliance is still yours as business owner and an awareness of some relevant areas of law will never go amiss. It’s recommended that you understand the basic principles of the following:

  • Contracts – agreement, consideration, standard provisions, etc.
  • Protection of confidential information and intellectual property (such as copyright, patents, trademarks and trade secrets) – both so that your own are safe and you don’t inadvertently trespass on the rights of others.
  • Labor laws – including employee statuses, tax responsibilities, benefits packages, and so on.
  • Any federal or state regulation relevant to your industry sector.

2. Setting up the wrong legal structure.
This is something to get right from the start. For example, if you establish a general partnership you – as a partner – will be jointly liable for the business’s debts and obligations. Should the worst happen, you stand to lose not only your investment in the business but also any personal assets you may have as well, including your home. Take advice on the advantages of some form of limited liability structure (e.g. corporation, LLC, limited partnership, etc).

3. Failing to spell out the rights and responsibilities of partners (and shareholders).

Don’t neglect to have a written agreement that sets out the following:

  • The capital each person is expected to contribute.
  • Responsibilities in the event that the business needs more capital.
  • The time and effort each person is expected to contribute.
  • Protocols in the event a person leaves the business (or dies).

4. Likewise for employees. 
Similarly, your people need clearly laid out standards, expectations, policy and rules. Be clear concerning the basis on which they are employed (e.g. “at will”) and make sure they are aware of any legislation that they themselves must comply with in the workplace (e.g. that relating to discrimination).

5. Oral agreements and contracts.
Oral agreements may be a legal contract under some circumstances but they are difficult to prove and enforce. Make sure all critical business contracts are written, reflect the agreement you came to, and offer a combination of flexibility and protection.

6. Poor record-keeping. 
To avoid the wrath of the IRS, as an employer you are required to keep certain records concerning employees:

  • Employee’s full name and social security number
  • Sex and occupation
  • Birth date (if the employee is younger than 19)
  • Mailing address
  • Time of day and day of the week when employee’s workweek begins, hours worked each day, and total hours worked each work week
  • Hourly pay rate Frequency with which employee’s wages are paid (weekly, bi-monthly, etc.)
  • Total wages paid each pay period
  • Date of payment and the pay period covered by the each payment
  • Total daily or weekly “straight time” earnings for each workweek
  • Total overtime earnings for each workweek
  • All additions to or deductions taken from employee’s wages

Also, in order to protect corporation status, a company must record Board of Directors meetings, meetings with shareholders, stock issuances and stock transfers.

7. Not retaining a corporate attorney.
Not only will a specialist lawyer be invaluable when it comes to stock-option plans, employee negotiations, state and federal tax rates, intellectual property rights, commercial contracts and all manner of other processes, but retaining the services of a good corporate attorney goes a long way to avoiding all the previous pitfalls on this list.

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