Big Legal Mistakes Every Entrepreneur Makes – And How To Avoid Them

The following is a guest post by Ryan B. Bormaster, managing attorney at Bormaster Law.

Everyone makes mistakes. It’s human nature. Unfortunately, the law doesn’t much care about that. As an entrepreneur, it’s your responsibility to make sure your new business is above-board. Because ignorance is no excuse if it isn’t. Here are a few errors and pitfalls you’ll want to avoid (and what you should do to avoid them).

You’re a businessperson first and foremost. A driven creative with a head full of ideas that will change the world. And you’re constantly seeking new ways to transform those ideas from concept to reality.

There’s just one problem: the law. Sure, these legal frameworks and regulations are designed to protect people – yourself, your founders, and your customers alike. But sometimes they can seem more like stumbling blocks than safeguards.

Here’s the thing, though. You can’t afford to ignore them. I’ve lost count of the number of entrepreneurs and small business owners who’ve run into legal trouble because they didn’t bother taking the time to understand something; good men and women who were punished because they unknowingly did something wrong.

As the old adage goes, ignorance of the law is no excuse. You need to be aware of the rules for business ownership, and you need to follow them more or less to the letter. Let’s talk about a few of the things you need to know in order to do so.

To keep your business legally above-board and yourself out of hot water.

Not Bothering With a Business Structure

First thing’s first, what sort of business are you forming? It does matter – the rules surrounding a limited liability corporation are very different from those around a sole proprietorship. Not only that, if you’re involved in the B2B space, certain client organizations might refuse to work with you if your business isn’t the right ‘type.’

Here’s a list of the different structures you might choose for your organization. I’d recommend speaking to a business attorney to help you decide which is the best option.

Not Establishing Proper Policies & Contracts

How does your business handle the personal information of its customers? What terms and conditions must clients adhere to if they’re going to work with you? If your business owns proprietary intellectual property, have you drafted non-compete and non-disclosure contracts for both clients and employees?

In the case of non-compete and nondisclosure agreements, it’s a matter of protecting your business from people who might steal its ideas. In the case of privacy policies and terms of use, it’s required by law – especially if you’re going to be working with anyone from the European Union. People have a right to know how you’re using their data, and a customer will be far less likely to work with you if you aren’t upfront about how your relationship will play out.

Speaking of non-compete contracts, do not, under any circumstances try to found a startup while under an existing non-compete agreement with a potential competitor. That should go without saying, but I’ve seen people try to do it. It’s not a road you want to go down – if you’ve got an idea for a business, wait for your agreement to expire, or try to find a way out of it (for example, starting your business in a market to which the agreement does not apply).

There’s also the matter of contracts. If your business does anything with an external vendor, you need to sit down with an attorney and draft up a legally-binding contract. Said contract must clearly establish the responsibilities of both parties, as well as the consequences if one party doesn’t hold up their end of the deal.

Word of mouth isn’t good enough here. While in some rare occasions a verbal agreement can be binding, it’s always best to have something in writing. Spoken words leave a ton of doubt; written records leave very little.

Ignoring IP Law

In the era of the Internet, you’d be forgiven for thinking that the concept of intellectual property has become somewhat distorted. After all, a few minutes online is all you need to be bombarded with content that’s been repurposed for both entertainment and business. What you might not realize is that a lot of that stuff might not be strictly legal.

One business I worked with in the past had an employee who used Google Image Search to track down photos and artwork for their blog. Unfortunately, said employee didn’t really stop to think about whether or not those images were royalty free. When the rightful copyright holder of several photos came knocking, they ended up with a pretty hefty bill.

It isn’t just media copyright you need to pay attention to, either. When registering your business name, you need to ensure you aren’t stepping on anyone’s toes – that you aren’t trying to trademark something that already belongs to someone else. And if you want to ensure no one else will use your business name, you’ll need to apply for a trademark yourself.

Finally, if your business has any unique invention – any concrete ideas or products which are demonstrably your idea – you need to apply for a patent. Otherwise, a competitor is free to come along and repurpose your ideas for their own ends. Some unscrupulous folks will likely try to do that anyway – but with a patent, you’ll at least have some legal recourse.

An Improper Business Plan

What do you want to achieve with your business?

I’m not talking about general goals and ideals. I’m talking about a concrete plan. How much you want your business to grow in the coming years, where you want your business to expand to, how much revenue you want your business to make.

Not only is this absolutely necessary to secure funding with investors, it’s also important for helping you focus your own efforts. If your plan is to expand to an overseas market by 2021, you’ll manage your startup differently than someone who simply wants to work within their own city.

Avoid promising – or planning – too much. One of the most important things about running your own business is to understand your limits. If you try to reach too far beyond those limits in your promises to investors and colleagues, that could easily be construed as fraud.

Poor Employment Documentation

You need to keep track of the people working for you – it’s the law. Yet too often, I see business owners playing fast and loose with employee documentation, paying people under the table and failing to establish employment contracts. While this might save you a bit of time and money in the short term, it can land you in huge trouble if the authorities discover it.

For each employee your business hires, you must ensure you have the following documents, and that they’re stored somewhere you can easily access them:

  • The W-4 Tax form from the IRS
  • Benefit forms, if applicable
  • An employee handbook that establishes company policies, conflicts of interest, etc (and proof that the employee has read and understood it).
  • An employment agreement that establishes the terms and conditions of the employee’s tenure with you.
  • UCIS form I-9
  • If applicable, non-disclosure and non-compete agreements.
  • Financial records that cover everything from payment to remuneration for on-the-job expenses.

Taxes? What Are Those?

I get it. Taxes are confusing. No one really likes doing them – it’s why your business should hire an accountant.

Because if you don’t, you’re going to be stuck with a massive tax bill (and possibly worse). You need to make sure you’re paying all relevant business taxes in a timely manner, and that you’re accounting for sales and payroll tax if they are applicable. Tax incentives and stock options are more things you’ll need to consider, as well.

Failing to Consult With an Attorney

I’ve left the biggest mistake of all for last. I don’t doubt you’re brilliant. Maybe you even have a decent grasp of the law. But the simple fact is that you’re never going to be as knowledgeable as someone whose entire career is dedicated to the legal ins and outs of the business world.

It’s imperative that you consult with an attorney specialized in your area of business – they’ll be able to walk you through everything you need to know and help you set things up while avoiding all the pitfalls on this list.

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