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Starting a business can be overwhelming, especially if you’re a first-time entrepreneur. While a new business has a lot of growth potential, there is also a possibility of making mistakes and failure.
While new business owners tend to make a lot of mistakes, making legal mistakes can be costly. They might even be devastating for your business.
In this article, we’ve put together a list of the common legal mistakes that you should avoid to build and grow your business smoothly. Let’s check them out.
Legal Business Start-Up Mistakes That Can Cost You a Lot
To build a profitable business, it’s important to avoid the following mistakes:
1. Not Registering Your Business Name
Before you buy a domain name or create your brand’s logo, you should make sure that no one else is using the same business name. You should perform a Trademark Search using the USPTO website to ensure that the business name you’ve selected is unique.
You should register your business name as a legal entity with your state and federal governments.
2. Not Choosing the Right Business Structure
The business structure you choose makes a huge impact on your business. You should take time to consider your options and choose the one that best suits your operational and management needs.
The most common structures include:
- Sole Proprietorship: Easy to start up, minimal compliance, pay taxes on your personal income report
- Partnership: Allows two or more members, minimal compliance, no liability protection
- Limited Liability Company (LLC): Requires state filing, provides limited liability protection, allows pass-through taxation
- Corporation: More complex filing process, double taxation, makes it easier to attract investors
You should evaluate the pros and cons of each business structure before making a decision.
Regardless of the entity type you choose, make sure that you complete all of the legal paperwork properly. As a newbie, it may be challenging to do everything correctly by yourself. You should consider leveraging the professional state and federal filing services of GovDocFiling to ensure that you make no legal mistakes.
3. Incorporating at the Wrong Time
Forming a legal entity is important as it makes sure that your company is authorized to do business in your state.
Entity types like an LLC and a Corporation also protect you from personal liability for business debts and lawsuits. However, they also come with additional costs – filing fees, annual fees, tax expenses, etc.
Before you decide to incorporate your business, you should make sure that the benefits of forming a Corporation outweigh the formation and operational costs. Incorporating your business when you’re not ready for the associated expenses can be a legal mistake and can cost you money.
4. Not Creating Proper Contracts and Agreements
Entrepreneurs often value speed over accuracy, which is why they tend to finalize deals and work relationships via verbal communication.
No matter how truthful and reliable your partners, vendors, and employees are, not creating proper contracts and agreements can cost your business time and money.
Whether you’re offering benefits to an employee or finalizing a product rate with a dealer, you should put everything in writing and get it signed by all parties involved. Make sure that your business contracts and agreements clearly define the smallest of details.
Some of the common contracts and agreements that you might need as an entrepreneur include:
- Independent contractor agreement
- Mutual non-disclosure agreement
- Unilateral non-disclosure agreement
- Employee agreement
- Confidentiality agreement
- Partnership agreement (if you form a Partnership)
- LLC Operating Agreement (is you form an LLC)
- Corporate Bylaws (if you form a Corporation)
Creating well-documented contracts and agreements will help you solidify your business relationships and prevent legal hassles and confidentiality glitches in the future.
5. Hiring Employees Without Completing All Formalities
Finding the right candidate and paying them is not enough to hire an employee. Before becoming an employer, you should familiarize yourself with the proper procedures to hire people.
When hiring people, you need to complete documentation like:
- USCIS Form I-9
- IRS Form W-4
- Offer letter
- Appointment letter
- Employee agreements
- Employee handbook
- Benefit forms
When starting a business, you should take the time to create these important hiring documents to protect your business from legal issues.
Confused about how to create them? Consider consulting a legal expert early to get the right advice and become a responsible employer.
6. Not Protecting Your Intellectual Property
It may not seem important initially, but you should safeguard your company’s intellectual property using copyrights, patents, and trademarks.
For example, you should trademark your business name and tagline to prevent competitors from creating a brand that confuses your audience later. Similarly, you can trademark or copyright your logo to prevent others from copying it.
7. Not Seeking Professional Help Early
Most entrepreneurs only reach out to experts when a situation gets out of hand. That can be one of the biggest mistakes, especially if you’re dealing with any legal issues on your own.
The right time to seek help from a lawyer is not when your business is threatened with a lawsuit. You should follow a preventive care approach and establish a good relationship with a lawyer early (preferably, when starting your business).
Collaborating with a lawyer will help you learn more about potential legal pitfalls and help you build a solid foundation for your business. They can help you ensure that you start, build, and grow your business smoothly and stay compliant with state and federal laws.
Conclusion
Starting a business demands that you make a lot of decisions. There is also a possibility of making the wrong ones.
If you can avoid these common legal mistakes when launching your new business, it will save you from added expenses and legal hassles. It will also help ensure that your business has a smooth start.
Do you need help starting your business the right way? Consult with our business formation experts to make sure that you don’t make costly legal mistakes.
Brett Shapiro is a co-owner of GovDocFiling. He had an entrepreneurial spirit since he was young. He started GovDocFiling, a simple resource center that takes care of the mundane, yet critical, formation documentation for any new business entity.
Photo by Alex Green from Pexels