Top 10 Legal Mistakes Small Businesses Make

Starting a new business is tough. The Small Business Administration estimates that half of all new businesses fail within the first five years after their creation, and only about one third survive 10 years or more. In addition to the economic and operational risks that every business faces, there are a number of legal mistakes made by small businesses which can and do have significant effects on their success or failure.

Here are the top 10 legal mistakes and what to do about them :

1. No incorporation. Too many entrepreneurs fail to establish the right legal structure for their company. At some point, this hurts them because they want to get outside investors, founders leave or they get sued by a customer or employee. Not having the right legal structure can open them up for personal liability. What to do: Determine if the best legal structure is an LLC, C or S corporation. Research establishing the company in the operating state or Delaware.

2. No shareholders’ agreement. When it comes time to sell the company or a founder leaves, a shareholder’s agreement guides everyone’s actions. Chaos will ensue without such an agreement. What to do: Have an attorney draft a legal document that states how issues will be decided between shareholders and what happens if one leaves, dies or gets divorced.

3. No human resource guidelines. Very small companies get in trouble because they do not have employee manuals to guide the conduct of their team. There are famous examples of very successful companies going bankrupt over lawsuits from former employees. What to do: Seek the advice of a human resource professional (or at the very least, professional software) to formulate human resource policies that fit the company.

4. Talking trash about their competition. The temptation for small businesses to talk trash about their competitors publically or anonymously on the web is growing. Be careful not to libel them. What to do: Seek the advice of an attorney for what is libel and what is freedom of speech.

5. Not getting a patent, copyright or trademark. Many small businesses fail to take the necessary steps to protect their intellectual property until another company steps in to take it. What to do: Seek the advice of an attorney to do an inventory of the company’s intellectual property.

6. Failure to avoid costly litigation. Litigation should generally be considered as a last resort. It is expensive and a drain on the time and efforts of any involved employees. Before getting involved in litigation, any small business should try to temper the emotions that are caused by a dispute and consider the costs and benefits of the litigation, just like they would any other business decision, and determine any collateral effects of the litigation as well.

7. Not protecting the customer data on their website. Small businesses are at greater risk for getting hacked. The problem is not just the website going down, but the possible loss of sensitive customer data. What to do: Explore services like SiteLock to secure the site and the data before it happens.

8. Personal use of the internet at work. It is now impossible for small businesses to prevent employees using the internet at work for personal reasons. What to do: Block inappropriate sites to protect the company and other employees. Frequently monitor web site usage of company computers for proper use.

9. Outside investors. Many small business owners bring in outside investors since they are desperate for cash. They then run into disagreement on how the company is to be run and the investors threaten legal action. What to do: Again, the identity of the investor is as important as how much money they bring to the company. Choose very carefully.

10. Failure to hire legal services. This point may seem self-serving, but working with a lawyer on legal issues is at least as important as working with an accountant on financial issues. Experienced counsel can help a small business spot and avoid legal issues before they become destructive to the company.

(*Source from Forbes)

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