Small Business: How to Avoid Common Legal Mistakes

How to Avoid Common Legal Mistakes

Many small businesses, especially entrepreneurial businesses or start-ups, resist acknowledging the legal realities that might make or break their business. No matter what a business does, in some way, shape or form, it always involves the law. As a result, a business owner can choose to look at legal issues as a burdensome cost of doing business, or look at the law as a tool to be leveraged just like any other asset in a business that, with the right legal counsel and advice, furthers its success. Regardless of how a business and its owner may approach the law and its role in the business, any business can spare itself unnecessary grief by avoiding five common legal mistakes. 

  1. Lack of Structure. Especially for solo entrepreneurs of start-up companies whose business oftentimes begins and ends with one or two individuals, forming a corporate entity may seem like an unnecessary complication. The reality is that by establishing a corporate structure, whether an S Corp, a limited liability company, a general limited partnership or any number of specialized entities, the business owner can protect his/her personal assets from liabilities incurred in the operation of the business, minimize his/her business and personal tax liabilities, and take advantage of other benefits afforded by the law. Evaluating and deciding upon a structure in which to do business is at the core of business foundation issues to be dealt with early on in the formation of the business and advancement of the business plan for operation of the business.
  2. Stepping on Someone's Intellectual Property Toes. You have a world-changing idea, a name for your business that will stick in customers' minds like glue, and an eye-catching logo. Before you invest your blood, sweat, tears and dollars on any of the aforementioned business attributes, you need to make sure that they are not infringing on someone else's intellectual property. As a result, a search should be done and due diligence should be performed to ensure that your company's business and branding don't expose you to infringement claims, or force you to make costly disruptive changes to your business down the road as a result of claims of interference by other similar businesses that have already claimed a certain "intellectual space" involving the same business attributes that you have developed.
  3. Undefined Roles and Responsibilities. You and your partners have all of the same dreams of success for your new business. While everybody may be on the same team, failing to clearly define the roles that each of you has in the business – who owns what, who does what and who controls what – is a recipe for conflict and confusion. You and your co-owners need to have a written partnership or shareholder agreement that makes clear the respective rights and obligations of each owner. Further, as time goes by and the business gains value, it is critical to have agreements in place so that if one or more of the business owners become disabled or even worse, dies, there are specific terms and conditions that govern the rights of the remaining business owners and the ability to purchase the exiting business owner's ownership interest based on pre-arranged structure, formula and price that will protect everyone, including the disabled or deceased member's family.
  4. Be Careful on Legal Do-It-Yourself Projects. Entrepreneurs and small business owners are always looking for ways to cut costs and maximize value. Many think of legal services as an area of possible savings, trying to use do-it-yourself ("DIY") legal services to replace the advice and expertise of an actual lawyer. Short-term, this strategy may seem to make sense, but it could lead down a costly road. While there are DIY legal services that entrepreneurs or small business owners can use, like customizable forms, documents, contracts or re-purposing contracts from others, it is a mistake to think DIY replaces lawyers. That said, there are certain opportunities to leverage DIY options to save money while making sure you are also getting the benefit of quality legal service. There’s a wealth of forms available via various online document providers (some of which are actually very good). As a result, some business owners believe everyday legal documents like employment contracts, leases, non-disclosure agreements and terms of services that can be adapted from a sample or template provided by a document service or colleague is sufficient. Think again. Customizing documents without the counsel of a trained lawyer may have serious pitfalls. Business owners can select the wrong corporate form, use a boilerplate contract with an employee or a vendor that doesn't account for the unique – and potentially troublesome – aspects of the business relationship, or incorrectly file for a trademark or provisional patent. Hiring a lawyer to remedy these errors or omissions after the problem has already occurred is far more expensive than getting it right the first time. Your business is unique, and so are your legal needs. While a majority of off-the-shelf documents could be applicable to you, the devil, as they say, is in the details. Lawyers are trained to spot those details. A good lawyer can understand what needs to be done based on exactly what your business does and how it does it. Even more important, your lawyer can make sure that legal documents make sense in the context of your broader concerns, hopes and long-term plans for your business. 

As a result, a business owner should be careful to view the law and how the law is involved in his/her business as another opportunity to leverage and grow rather than as just another set of administrative hoops to jump through in order to have the privilege of executing one's business plans. 

In my firm, we are always happy to speak to entrepreneurs, individuals involved in new start-ups and small business owners to determine how we can provide services for each business owner's unique set of circumstances and assist the business to achieve its goals. Please contact us.