Common Legal Mistakes Made by Small Businesses 

Small business owners are often prey to legal pitfalls that potentially expose the company or themselves to unforeseen liability, costing their business significant sums of money. The greatest legal mistake of a small business owner is not hiring an experienced attorney who will provide timely guidance as the business grows. Below are some other common legal mistakes businesses may encounter and suggestions on how to deal with them:

 Failing to Keep Accurate Records such as resolutions of director and shareholder meetings, or a list of equity ownership can result in significant consequences if the owner intends on selling or merging the business. Also, if a business owner co-mingles business assets with personal assets, a creditor could sue the shareholders personally for not following proper corporate formalities. If a court were to agree, the shareholders may lose the limited liability protection of a corporation and become personally liable for the company’s debts. 

Failing to Deal with Employees Properly could impose significant liability on the company because the company could be held liable for the acts of its employees or if it is aware of an unsafe work atmosphere. For example, the failure to police the company for sexual harassment issues could impose significant fines on the company from the Equal Employment Opportunity Commission. To help mitigate potential problems, a company should have an employee handbook, workplace safety rules and hiring and termination practices that have been reviewed by their attorney. 

Ignorance of the law is not a defense to any action. By ignoring environmental laws, zoning laws or tax laws applicable to your business, the State and Federal government can find the officers and owners guilty of violations whether or not they knew they were in violation. These violations may make the company subject to monetary liability. Review your specific industry and situation with an attorney to learn what laws are applicable to your business. 

Choosing the Wrong Business Entity can be a detrimental to a business. Many business owners feel that they should automatically incorporate their business. However, based on their goals, the direction of the company and other important factors, this may not be the best decision. An experienced attorney will guide owners through the various business entities to make the proper choice that will save them time and money. Features to look for in an entity are limited personal liability, amount of record keeping and future financial needs 

Not Having Good Written Agreements may make enforcing contracts difficult. Oral contracts may be enforceable, but they are hard to prove since the exact terms are not in writing, which results in a he said/she said debate. Well written contracts alleviate any ambiguity in the contracting process and confusion in the performance. An attorney review should help you understand the terms, liabilities and expectations of your contracts. Form contracts have their benefits, but an attorney's review to insure they contain business specific language to your business is important. 

Not Documenting Succession Plans could negatively impact the transition of the day-to-day management of the company in the event of retirement, death or disability of an owner. Furthermore, succession planning also deals with the disposition of the shares to third parties during the relationship. Companies may place restrictions on the sale of the equity by owners by using a shareholder agreement or buy-sell provisions in an operating agreement. Without such restrictions and if an owner transfers his/her equity interest in the company, the remaining owners may get stuck with a partner with whom they are not compatible. Also, in the event of death, an owner may become partners with a deceased partner’s spouse which could be catastrophic to your business. 

Failing to Protect Intellectual Property such as software programs, logos, domain names, etc. which may be the most important assets of the company is another common mistake. Intellectual property can be protected through copyrights, patents, trademarks and trade secret protection. In addition to filing the various intellectual property applications, you can protect your intellectual property by having employees and consultants execute confidentiality and invention assignment agreements which protect material created by employees and consultants as works made for hire. 

In conclusion, these are only a few of the legal pitfalls that a business may encounter; however, the better one is equipped at recognizing legal issues as they arise, the better prepared one is to prevent and manage them. The best way to manage legal pitfalls and mitigate any damages is to retain a qualified, experienced corporate attorney.

 

Written by Louis Zambrio, Attorney at the law firm of OlenderFeldman LLP.

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