5 Common Legal Mistakes To Avoid When Starting A Business

The time and effort you need to get a business started can be overwhelming. It’s a challenge regardless of how much experience you have in the business world. So much is on the line that you don’t want to make a costly mistake.

As you work to raise capital, find and hire contractors to set up a brick-and-mortar or an online business presence, and get ready to open those real or online doors to customers, it’s easy to overlook legal issues that could cause a business to fail before it even gets started.

It’s not that difficult to anticipate and avoid common legal mistakes when starting a business. First, you need to identify them, and then you need to come up with a way to avoid them.

We’re helping you to get started by listing the five common legal mistakes and suggesting ways to avoid them. When you finish reading through this article, the next step should be a consultation with Tung & Associates, APCL, where a business attorney will come up a customized plan that addresses the legal issues faced by new businesses.

Common Mistake 1: Choosing the wrong business structure  

Every business needs a structure in order to operate. The structure of a business, which you may hear referred to as “business entity,” determines how a business pays its taxes, raises capital and the risk that owners face for debts and legal obligations of the business. Choosing the wrong business structure could result in missing tax-saving opportunities aside from putting your personal assets at risk of being seized to pay claims owed to business creditors.

Each state has its own laws authorizing different types of business structures, but the four most frequently authorized and used types include:

• Sole proprietorship: The easiest of all business structures to create and operate, a sole proprietorship does not distinguish between the owner and the business. In a sole proprietorship you are the business as far as the law is concerned. You report business income when on your personal income tax return and must answer for debts and legal obligations of the business.

• Partnership: When two or more people join together to operate a business for profit, they cannot operate as a sole proprietorship. A partnership structure allows them to raise additional capital by adding partners. It does not protect the owners from the risk of personal liability for financial and legal obligations of the business.

• Corporate: Unlike sole proprietorships and partnerships that do not exist separate and apart from their owners, setting up a corporation creates a separate legal entity that exists independently from its shareholders, who are its owners. As a result, you have the ability to raise capital by selling shares and the corporation shields its shareholders and their assets from answering for the debts and obligations of the corporation.

• Limited liability company: An LLC shares many of the same characteristics of corporations, including protecting owners from personal liability, but it is set up and managed differently than the corporate structure.

A business law attorney will help you choose and set up the business structure that best suits your type of business.

Common Mistake 2: Doing business without proper licenses

State and local governments require that most types of businesses obtain licenses and permits depending on the products or services offered for sale. However, complying with state and local requirements may not be enough to put your business in compliance with the law and avoid fines and other forms of regulatory action.

If your business plans to engage in activities or handle products regulated by the federal government, you may need a license or permit from a federal agency. For example, producing, importing or exporting wine and other beverages containing alcohol may require permits from the federal government. The same is true with firearms and ammunition, certain species of wild animals and other types of business activities particularly those involving foreign trade.

Common Mistake 3: Failing to take steps to protect intellectual property

Intellectual property can be a valuable asset that needs protection. The name, logo, website design, domain name, and commercial secrets of your business can be taken away and lost by not taking steps to protect them. Your business attorney can show you how trademarks, patents, copyrights and other protective measures can prevent valuable assets from being stolen from you.

Common Mistake 4: Not using written contracts 

Verbal agreements can be legally binding and enforceable in court, but it is difficult, and frequently impossible, to prove what two parties agreed upon unless it is in writing. A written contract actually avoids conflicts and disagreements because each party to it can see what was agreed upon without resorting to what may be a faulty recollection of a conversation. 

Common Mistake 5: Failing to consult with an attorney from the beginning

Too many entrepreneurs think of an attorney as someone to call when problems arise, but it is much better to let an attorney show you how to avoid problems before they harm your business. Preparation and review of contracts, proper formation and licensing of the business and other tasks entrusted to a business attorney at Tung & Associates, APLC, lets you focus on starting and running your business without worrying about legal issues. Contact us today for consultation.

Disclaimer:

This article and its contents are provided for general information purposes only. It is not offered as legal advice and should not be relied upon as such by a reader. Nothing contained in it is intended as legal advice or presented for purposes of establishing an attorney-client relationship.