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:
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:
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:
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.