Legal Mistakes New Business Owners Make

Starting a business is exciting until the paperwork, contracts, taxes, and legal requirements start piling up. It is easy to push those details off while you focus on getting customers. That can create problems later on. Knowing the mistakes new business owners make can help you avoid some of those problems before they become expensive ones.

Key Takeaways

• Mistakes can easily be made during formation, operation, and closing.
• Working with an attorney before you need one can help prevent legal issues.
• Employees can create additional legal responsibilities
• Depending on the business and industry, there may be licensing, permitting, or regulatory requirements.

Choosing the Wrong Business Structure

There is no single business structure that works for every new company. A sole proprietorship might seem like the easiest place to start. An LLC may seem like the obvious choice because of its popularity. Partnerships and corporations may make more sense in other situations. The right decision depends on more than how easy an entity is to form.

Liability, tax considerations, management, ownership, continuity, and the possibility of transferring ownership can all factor into the decision. Business owners also need to understand what is required after the entity is formed. Simply filing paperwork with the state does not mean the business can ignore the rules that govern its operation.

Failing to Properly Document Ownership and Management

Failing to document ownership and management properly is one of the most common mistakes new business owners make. You and your business partner may agree on everything today. That doesn’t mean you’ll agree on everything two years from now. New business owners often focus on getting the company started. They leave ownership and management details to a verbal agreement. That can create problems when the business grows.

A properly drafted operating agreement, shareholder agreement, or other governing document can spell out who owns what. They can designate who has authority to make decisions. Spell out how profits and losses are handled. Eventually, an owner will want to leave, so there should be a plan in place for when that happens. Clear agreements can help prevent disagreements from turning into costly disputes.

Mixing Personal and Business Finances

Never mix personal and business finances. Business owners who fail to do this can put their personal financial stability at risk. The protections that are provided by certain business formations could be undermined. If a legal issue arises, their personal finances and assets can be brought into the lawsuit. Avoid this by opening and using separate business accounts. Avoid treating the business account like a personal checking account.

Operating Without Written Contracts

A simple misunderstanding can cost you a lot. Maybe you and a vendor remember a payment deadline differently, or a customer expects a service that you never agreed to provide. When the agreement was only a conversation, text message, or handshake, sorting out what actually happened can get complicated. A written contract gives everyone a clear reference point. Depending on the relationship, it can cover:

• Services or products involved
• Payment terms
• Deadlines
• Each party's responsibilities
• Confidentiality
• Ownership of work
• Termination
• Dispute resolution
• Liability

New business owners should also resist the temptation to grab a generic contract online and call it done. The right agreement depends on the particular relationship and the risks involved. Having an attorney review or prepare a contract before signing can help address problems while they are still easy to solve.

Overlooking Licenses, Permits, and Other Compliance Requirements

Texas does not require a general statewide business license. However, that doesn’t mean every business can operate without licenses or permits. Licensing requirements can depend on the type of business and the state, county, and city where it operates. Zoning and local requirements may also matter depending on the business location. Some industries also have their own requirements for occupational licenses, permitting, and registrations.

Treating Employment Issues as an Afterthought

As a business grows, the owners will eventually need help. This means hiring employees. However, hiring employees brings additional legal responsibilities. Hiring employees without addressing these responsibilities first is a mistake. Business owners need to properly classify workers. They need to understand wage and hour requirements. Employment laws must be followed. The business should have legally compliant and appropriate workplace policies that employees will follow.

Failing to Protect the Business's Name and Intellectual Property

Simply starting a business with a particular name doesn’t automatically protect it. Business owners need to take additional steps to protect their brand and intellectual property. The name, logo, slogan, website content, software, designs, or other identifying materials can be protected by registering a trademark.

Similarly, it’s also important to perform a trademark search before forming a business. That way, you don’t accidentally start a business with a name, logo, or trademark that violates someone else’s trademark. Other intellectual property can be protected through other legal mechanisms, such as copyright registration, patents, or confidentiality agreements.

Ignoring the Business After Formation

Another common mistake new business owners make is ignoring the business after formation. Don’t assume that the legal paperwork is done once the formation paperwork has been filed. Business owners often assume that their business paperwork is a one-time task. But this isn’t the case. Businesses change over time, and the formation documents may no longer accurately reflect the business. When this happens, the documents need to be updated. Legal documents should be periodically reviewed to reflect changes such as:

• Change in ownership
• Change in ownership percentages
• New locations opening
• Hiring employees
• New or changed contracts

A skilled business attorney can help you determine the documents you need to have in place as your business grows.

Waiting Until There Is a Legal Problem to Call an Attorney

There’s a difference between preventative and reactive legal work. When you work with a lawyer from the beginning, you can benefit from legal guidance to avoid the common mistakes new business owners make. For example, preventative legal work is a lawyer reviewing a contract before you sign it. Reactive legal work is hiring a lawyer after a lawsuit has been filed against you over a contract dispute.

In the first instance, the lawyer can advise on potentially problematic terms. They can suggest terms that may have been left out that would benefit you. In the second instance, the lawyer must work within the parameters of the contract you already signed. Waiting until you have a legal issue to contact an attorney can limit your legal options.

Speak With a Business Attorney

The legal decisions you make when starting a business can follow you long after the excitement of opening the doors has worn off. Taking the time to address contracts, ownership, employment matters, intellectual property, and other legal requirements now can help you avoid the common mistakes new business owners make. Jameson & Powers, P.C. provides legal guidance to Texas business owners at every stage of their companies. Schedule a consultation online today or call 972-732-8080 to discuss what you may need for your business.