Ten Legal Mistakes to Avoid as an Entrepreneur
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You've started your new business, designed your website, established your marketing and social media plan, and started selling your goods and services. You've met with your accountant, but you've decided to pass on the expense of a lawyer. After all, between your accountant and YouTube university, you've got all of your legal bases covered, right?
Wrong. After years of advising small businesses and startups, here are some of the most common legal and compliance mistakes that I see.
1) Not picking an entity type.
If you haven't decided to file with your state as a limited liability company (LLC), corporation, or some form partnership, you may risk unlimited personal liability because you're likely a sole proprietor if you're in business for yourself.
By the way, if your lawyer or accountant says "limited liability corporation," you should fire them. It's called limited liability company.
2) Picking the wrong entity type.
There are differences between LLCs, corporations, and partnerships. For example, in most states when two or more people join together for a business enterprise with the intent to make a profit (even if they don't), they default into a general partnership. Typically, a general partner is liable for her partner's misdeeds. A limited partnership may therefore make more sense.
There are also differences between limited partnerships and limited liability partnerships. Corporations taxed under Subsection C and Subsection S of the IRS code have different rules. You may know them as C corps and S corps, but there are tax and other important rules that can cost you money and limit the type and number of investors.
Don't just do a cursory search online for guidance. Seek out a professional for advice.
3) Relying on your accountant for legal advice.
I recommend that you seek a professional, but don't ask your accountant for legal advice. To be honest, accountants know a lot about corporate legal issues. But there are some nuances they may not know.
Additionally, accountants and lawyers may recommend different entity types for different reasons. Some entities have stronger liability protections and some have more tax advantages.
No matter where you get your advice, make sure that your advisor thinks about key issues such as your potential funding sources, risk tolerance, desired level of control, liability concerns, intent to go public, and exit strategy. You also need to follow all of the state rules for starting your business.
4) Not having corporate documents.
Even if you're the CEO and employ your family members to help run your business, you still need basic corporate governance documents such as articles of incorporation, articles of organization, bylaws, minutes, consents, stock certificates, etc. depending on the entity type.
If you partner with someone else, you should have a shareholder or partnership agreement to outline rights, obligations, contributions, and termination, among other things.
5) Not having separate bank accounts or appropriate formalities.
Part of the reason to form an entity is to avoid personal liability for the acts of your business. But if you don't maintain enough separateness from your business, you could lose that protection.
Lawyers refer to this as "piercing the corporate veil." This means that either you could be liable for the debts of your business or your business could be liable for your personal debts. It's rare, but it happens.
6) Copying contracts from the internet.
Sometimes downloading a contract is worse than having no contract at all. You may cause unintended problems by using forms you haven't had reviewed by counsel.
It's tempting to look at contracts or provisions from established companies or even from companies that use artificial intelligence to create your contracts for a fee. But, there may be specific issues related to your business that aren't covered.
No contract is neutral. They always have provisions that favor one side or the other, so be careful.
7) Signing contracts without making changes.
Let's say you get a contract from your dream client. You don't understand all of the legalese, but you don't want to ask questions or lose the client.
Even if you think you don't have a lot of bargaining power, always try to make changes to the contract that benefit you. If you can't afford a lawyer, make sure you understand the jargon and any penalties you may have for breaching the contract.
8) Not protecting your intellectual property.
Make sure that you're not infringing on anyone else's IP while you’re developing your social media and advertising campaigns. You may have the rights to a domain name, but ensure that your company name, logo, or tagline isn't already claimed by someone else. Keep in mind that there are often state laws that provide IP protection even when federal law does not.
9) Ignoring the labor and employment laws.
Have you made everyone an independent contractor to avoid paying taxes? Is everyone salaried so that you can avoid overtime? These are two of the most common and expensive mistakes an entrepreneur can make.
There are dozens of state, federal, and local employment laws that may cover you depending on how many employees you have or whether you're a federal government contractor or subcontractor.
10) Not taking privacy and cybersecurity seriously.
It's not a matter of whether you will suffer a data breach, it's when. Major corporations can pay the fines and costs for credit monitoring, but a breach can drive a small company out of business.
Unfortunately, depending on your company's reach and your industry, you could have to comply with dozens of state, federal, and international data protection laws. Fortunately, the federal government provides guidance to help small businesses protect data.
Each of these ten mistakes could merit their own separate articles, but now you have an idea of what to look out for. Remember, I'm a lawyer, but not your lawyer. Please check your own state law and consult with counsel.
Marcia Narine Weldon is a lawyer, executive coach, business consultant, and former Fortune 500 company executive with over twenty years of experience helping high achievers transform their lives and companies reduce their legal, compliance, and turnover risks.
Have more questions? Follow up with the expert herself.
I'm a lawyer, executive coach, business consultant, and former Fortune 500 company executive with over twenty years of experience helping high achievers transform their lives and companies reduce their legal, compliance, and turnover risks. I help people love what they do and do what they love. For fun, I improve my Spanish by watching campy telenovelas and learn new energy healing modalities to combat stress. Continue Reading
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