Starting a Business
Halt | August 12, 2022 | 0 Comments

8 Common Legal Mistakes When Starting a Business and How to Avoid Them

Starting a business is an exciting time. The dreams and aspirations for the business can inspire and drive you to success in your new venture.

The enthusiasm during this time is palpable. However, it can also lead to mistakes that can get business owners into trouble. Knowing how to avoid common legal mistakes can ensure you do not face financial penalties and legal issues that can arise, either due to neglect or simply being unaware.

Starting a Business Avoid These Mistakes

Here is a look at 8 common legal mistakes when starting your own business and how to avoid them.

1. Not Having Legal Counsel

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Getting legal advice is critical at each stage of your startup. Your lawyer is there to provide counsel, insights and oversight. They ensure that your business does not conduct itself in ways that can lead to legal or financial problems.

Using an attorney will save your business time and money. You should not draft legal documents on your own, either. Let your lawyer draft and review documents to ensure that you are protected. Without the right legal advice, you could find your company in hot water later … and online templates are only helpful to a certain point.

An experienced attorney can become a trusted advisor, providing unbiased perspective on various business matters. A commercial business lawyer with experience in your industry and size can be an invaluable member of your team.

2. Not Creating the Right Business Structure

One of the most important first decisions you need to make as a business owner is what business structure you will use. Your business structure is the legal organizational method you use for your company.

There are many options available to you, from sole proprietorships, to limited liability companies (LLCs), general partnerships, limited partnerships, corporations and nonprofit organizations.

Each business structure has advantages and disadvantages, especially around how your business is taxed and what liability protections are in place. Here is a look at the most common structures.

  • LLC. Many small businesses choose an LLC structure. An LLC protects you from creditors coming after your personal assets, such as your house or savings, to cover business debts. With an LLC, you can choose to manage the business yourself or hire a management group to do so
  • Sole Proprietorship. The simplest business structure, the sole proprietorship typically involves one person who owns and operates the business. Any profits are losses are reflected on the owner’s personal income tax returns. This structure does not provide any personal protection from liability to the business owner
  • General Partnership. In this business structure, several individuals own the business but there is no formal organization. Profits and losses related to the partnership pass through to the individual tax returns of the owners; the partnership itself is not taxed. Like wi9th a sole proprietorship, the general partnership structure does not protect the owners from liabilities related to the business
  • C Corporation. A C corp is an independent business entity, separate from any of its owners or directors. It’s a common choice for companies that are looking for venture capital funding or considering going public at some point. C corps can offer either common or preferred stock to its founders, directors, investors or employees. Preferred stock lets holders be prioritized in receiving dividends. With a C corp, the business is subject to various regulatory and tax requirements different from less complex business structures. There is no personal liability. From a tax basis, however, profits are double-taxed, both at the corporate level and at the stockholder level
  • S Corporation. The S corp operates much like the C corp but has some tax advantages. With an S corp, profits are not taxed at the corporate level. Income instead passes through to owners’ personal tax returns. Businesses can use the cash method of accounting, meaning income is taxed when it’s received and expenses are deducted when paid. Some business income can be paid to you as salary and some as business income, which can have favorable tax benefits

Businesses need to file various documents, some annually, based on their business structure. Keeping these documents and filings up to date is an important operational matter. Many businesses choose to outsource this work to a third-party that specializes in business filings.

3. Not Complying with Data Mandates

Increasingly today, various jurisdictions are passing laws guiding consumer and employee data. Privacy is critically important to many individuals, who seek control of how businesses manage and use their personal information.

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One major new legislation is the General Data Protection Regulation (GDPR), which became law in the European Union in 2018. The GDPR gives EU citizens more control of their personally identifiable information that is collected, stored, sold and used by businesses. The GDPR covers a wide range of data that may be collected – name, address, email address, phone, banking information, social media posts, medical information or even IP addresses.

The GDPR requires companies to have statements that are written clearly, without rambling or confusing terms and conditions. Every time a company uses data for a new purpose, a new request for consent must be issued. It also covers breach notifications. Companies have 72 hours after discovery of a breach to notify those whose data is compromised, by email, phone or public announcements.

Among the other requirements are the rights of EU citizens to access how their information is being used and to be forgotten, meaning the business must erase all data related to that person.

California and other states have also passed strict data laws. It’s incumbent on businesses to understand and abide by these laws or face stiff financial penalties.

4. Not Creating and Managing Documents

Document management is an important part of every business. Agreements that are drafted and agreed to over the phone or email need to be formalized and vetted by legal counsel. Otherwise, what was agreed to may be challenged in court, leading to expensive and complex court time.

Employee agreements are one important area where businesses can falter. Given the increased use of contract and gig employees, having written agreements that spell out pay rates, terms, and deadlines are essential.

Accurate record-keeping is important, too. Founders, owners and employees need organized systems for their documents. Accurate record-keeping, especially financial records, help founders understand where the business is and how it’s progressed over time.

5. Not Following Tax Laws

Tax laws are complex and always changing. As a business owner, you’re responsible to ensure that taxes – income, sales, employee, use and others – are paid on time at the federal, state and local levels. Establishing clear procedures related to tax is important, whether using your own accountant or hiring an outside accountant to manage your financials.

6. Not Protecting Intellectual Property

Your ideas, plans, logos, solutions, products and services all are the intellectual property of your business. Protecting that intellectual property ensures that your financial interests are preserved. Patents, copyrights and trademarks are all designed to protect those items that you create. It’s a good idea to have employees sign non-disclosure agreements to ensure information cannot be leaked or used outside the business without legal consequences.

7. Not Limiting Liability

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You don’t want to obsess too much about what can go wrong. However, protecting yourself and your business is important. That means having the right insurance coverage, policies and procedures in place, and protections that will limit your liability in the case something goes awry.

8. Not Addressing Legal Issues

Legal matters crop up for any business. The last thing you want is for minor legal issues to become major problems. That’s why having your ducks in a row, your legal advice in place, your business structure confirmed and managed, are all crucial.

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