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The 8 Most Expensive Legal Mistakes Entrepreneurs Make

The 8 Most Expensive Legal Mistakes Entrepreneurs Make

By: Laura E. Cowan, Esq., CPA

Entrepreneurs are always looking for ways to cut costs and maximize value. They may think of legal services as an unnecessary expense and try to get away with using DIY forms on the internet rather than seeking the advice and expertise of a qualified attorney. This strategy could prove to be very expensive down the road and even put you at risk of going out of business. Here are some of the most expensive legal mistakes entrepreneurs make, and what you can do to avoid them.

Expensive Mistake #1: Choosing the Wrong Business Entity

You’re starting a business! Congratulations! Selecting the right business entity and setting it up correctly is one of the first things you should do. There are multiple business entities to choose from – sole proprietorship, general partnership, LLC, corporation, PLLC - all with their own advantages, disadvantages, and tax consequences. Knowing which one is right for your business and taking the steps to set it up legally cannot be overlooked. Choosing the wrong entity (or not choosing one at all!) can expose you unnecessarily to personal liability for the actions of your business and may result in negative tax consequences. In other words, hit you where it hurts the most: your wallet.

Expensive Mistake #2: Not Documenting Agreements

That business strategy conversation you had with your partner a couple of months ago? The one you both forgot about until now when a big decision needs to be made, and you have different recollections of what was agreed upon? That’s going to turn into a much bigger problem than it needs to.

Documented agreements are a must for every small business owner. Although handshakes and oral agreements are binding in many cases, the problem with these unwritten agreements is that it can be nearly impossible later to determine what the actual agreement was. Two well-meaning people can disagree on what was decided and trying to figure it out can be expensive. The document itself does not have to be complicated, but you want to be sure to identify each party, spell out their respective obligations, agree on a way to resolve disputes, and detail under what circumstances the contract will be terminated.

Expensive Mistake #3: Running Afoul of Employment Laws

This is a big area of risk in your business – not abiding by complex employment laws. One common mistake we see among small business owners is misclassifying team members as either employees or independent contractors. Why does this matter? Wrongfully classifying an employee as an independent contractor can mean running afoul of Worker’s Compensation laws as well as additional taxes being owed. If you are not sure which category your team members should be in, it’s worth it to work with a qualified business attorney to make sure you are doing things by the book.

Expensive Mistake #4: Starting a Competing Business While Still Employed

You do not want to start a competing business while still employed at your current job. If you intend to compete with your employer, be sure to do it in a way that does not leave you at risk of a lawsuit and protects you if you do get sued. Be sure to review your employment agreement for non-complete provisions. If there is one, seek a qualified business attorney to ensure you don’t violate those provisions. And if you do begin a business in competition with your former employer, consider buying insurance to mitigate your losses in the event you are sued. The cost of defending a lawsuit, even if you win, could put you out of business before you even begin.

Expensive Mistake #5: Not Protecting Your Intellectual Property

There is no precise definition of “intellectual property” but it can be divided into the areas of trademarks, patents, copyright, database rights, designs, and confidential information. Think you don’t have intellectual property? If you have a website, you have intellectual property; your logo, copy, and brand are all intellectual property worth protecting. One of the biggest mistakes we see is business owners hiring copywriters, web designers, or other providers of creative content without ensuring that they will own the content when it’s complete. It’s worth it to work with a business attorney who will help you not only protect your intellectual property but help you maximize its potential value.

Expensive Mistake #6: Not Having a Will or Trust

What will happen to your business if you become incapacitated or die? How will your family cope? Who will manage your company after you are gone? If you have a business partner, how will she buy out your family in the event of your incapacity?

These questions should be answered and documented properly in a comprehensive estate plan. Every business owner should at a minimum have a will or trust, financial power of attorney, health care proxy, and succession plan to ensure smooth transition in the event of your incapacity or death. Do not attempt to draft these documents yourself; it is likely they will not be drafted, or executed, properly, and these errors will end up costing you a lot more in the long run. Instead, find an estate planning attorney in your area who has expertise working with small business owners to ensure your estate plan is done correctly and aligned with your business goals.

Expensive Mistake #7: Not Knowing What You Don’t Know

The biggest traps to watch out for are the ones you don’t even know about. The adage “what you don’t know can’t hurt you” does NOT apply when running a business. As an entrepreneur, not only can what you don’t know hurt you, it can put you out of business.

There is a lot to learn about documenting agreements correctly, buying the right insurance, and understanding which tax rules you should be following when running a business. If you don’t want to invest the time in learning everything yourself (and I don’t recommend you do, as you should be spending your time doing what you do best – running your business!), team up with a business attorney who will work with you to proactively to nip costly mistakes in the bud – especially the mistakes you don’t even know you are making.

Expensive Mistake #8: Not Having an Advisory Team

For those of you who have already gotten your business off the ground, you know it takes a village. All successful businesses have a team of advisors to support them, and so should you. You’ll want to find a bookkeeper who can keep track of your revenue and expenses, and a CPA who can advise you on taxes and maximize your deductions. A financial advisor can help you with financing the growth of your business. You should also develop a relationship with a local bank, so you have a line of credit ready before you need it, not after. The value these advisors give in terms of protecting you and your business far outweigh their cost.

Finally, find a lawyer you love! I recommend working with an attorney who is business-savvy and understands the entrepreneurial spirit. A lawyer who has their own business is ideal, as who better to help guide you than someone who is facing the exact same challenges? And although it may seem like finding a needle in a haystack, it’s worth it. Why? Because nothing you learn in a law book can compare to what you learn in the trenches. Finally, work with an attorney who offers fixed-fee monthly packages instead of billing by the hour. This kind of arrangement is a real win for you as the business owner; it will give you confidence your business is not running afoul of any laws, proactively manage risk, and provide you with a trusted advisor you can depend on, all for an agreed-upon flat monthly flat fee.


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