Top 6 Legal Mistakes Small Businesses Make and How to Avoid Them

By: Marc Summers

Navigating the legal landscape is crucial for any business success. However, many companies make common legal mistakes that can lead to significant challenges. This article briefly highlights the top five legal pitfalls and offers guidance on how to avoid them.

1. Inadequate or Incorrect Business Structure

Choosing the wrong business structure, or not having a business structure, can have potentially significant tax and liability implications. Many businesses fail to consider the long-term effects of their choice in that they do not take into account potential tax savings or liability protection advantages provided by certain business structures.

Avoidance Tips:

• Consult with legal and financial advisors to select the appropriate structure for your business (e.g. LLC, Corporation, etc.), or to determine if a restructure is also appropriate.
• Consider factors like liability protection, taxation, and management flexibility to determine with your advisors the appropriate business structure for you and your business.

2. Company Governance: Not having appropriate documents

Businesses without formal agreements are more vulnerable to internal disputes, especially those with multiple owners. Issues can arise around decision-making, profit sharing, and ownership transfers.

Avoidance Tips:

• Have an attorney draft operating agreements or bylaws that clearly outline ownership, decision-making, and dispute resolution protocols.

3. Contract Management

Contracts are the backbone of business relationships, yet many companies neglect to draft clear and enforceable agreements. The days of a “handshake deal” are unfortunately a thing of the past. Contracts help to avoid confusion and spell out the specific rights and duties of the parties involved. 

Avoidance Tips:

• Seek legal review for complex agreements – and “simple” agreements. The use legal counsel to prepare contracts, even if you do not think you are “big enough” to use a lawyer, outside general counsel services can help to reduce ambiguity in contracts.
• Regularly review and update contracts to reflect current business practices.

4. Compliance with Regulations and Company Governance

Failing to comply with industry-specific regulations can result in fines and legal actions. Failure to comply with company governance requirements can result in a loss of liability protection.

Avoidance Tips:

• Stay informed about relevant laws and regulations for municipal, state and federal.
• Implement compliance programs and conduct regular audits.
• Ensure that annual meetings and the necessary minutes are prepared at least annually and that all reporting with the State is completed on time every year.

5. Intellectual Property Oversights

Neglecting to protect intellectual property can lead to loss of competitive advantage and legal disputes. Whether it is your company name, brand, or trademark, regardless of the size of your company, your company intellectual property needs to be protected and monitored.

Avoidance Tips:

• Register trademarks, copyrights, and patents as needed.
• Monitor and enforce intellectual property rights.
• Conduct intellectual property audits to identify and protect valuable assets.

6. Employment Law Violations

Missteps in employment law, such as improper classification of employees or failure to adhere to labor laws, can lead to costly lawsuits.

Avoidance Tips:

• Classify employees correctly and comply with wage and hour laws. There is a big difference between a W2 employee and a 1099 Independent Contractor.
• Develop and employee handbook with clear employment policies and procedures.
• Provide regular training on employment law compliance.

Conclusion

Avoiding these common legal mistakes requires proactive planning and ongoing diligence. By understanding and addressing these issues, businesses can help to protect themselves from legal risks and liabilities, and focus on growth and success. Regular consultation with legal professionals is essential to navigate the complexities of business law effectively, so that you can focus on the important part – growing a successful business.

At McDonough Law Group we provide business services for all businesses big and small. Whatever your needs, McDonough Law Group can assist by providing an array of services from in-house and outside corporate counsel services to small business legal subscription services that allow companies access to superior legal services on an as needed basis. Let the attorneys at McDonough Law Group perform a business stress test on your company to assess any risks and liabilities, and to proscribe the action steps needed to fix any such exposure. Contact us to schedule an appointment.