When starting a business, it is common for new entrepreneurs to forgo seeking professional legal advice. While many aspiring business owners may pay a premium for a new website and advice from marketing and accountancy professionals, these same individuals often feel that they can avoid hiring a competent legal professional, at least in the beginning. Unfortunately, these people are more likely to make some common legal mistakes that entrepreneurs should avoid. If you are an entrepreneur getting started with your business venture and want help avoiding these common legal errors, consider contacting Polymath Legal PC by calling (833) 931-6418 to schedule a consultation.
Understanding Common Legal Errors for Entrepreneurs
According to the United States Bureau of Labor Statistics, 20 percent of new business ventures will fail within their first two years, and almost 50 percent of businesses cease to exist within five years. Many of the mistakes that lead to a business’ failure are preventable legal errors. Thus, it is advisable for entrepreneurs to seek professional legal advice. A skilled lawyer can help prevent new business owners from making basic legal errors and improve their chances of business success. Each of the following common legal and compliance mistakes that entrepreneurs should avoid will be discussed in more detail throughout this article:
- Failing to choose a business type or selecting the wrong one
- Seeking legal advice from an accountant
- Avoiding the correct documentation, bank accounts, and other formalities
- Not taking the time to create effective contracts
- Not considering intellectual property, cybersecurity, and privacy
- Failing to consider employment and labor laws
Failing To Choose a Business Type or Selecting the Wrong One
Many entrepreneurs start their businesses without realizing that if they do not register their venture as a partnership or a limited liability company (LLC), they risk being personally liable for their business’s losses as a sole proprietor. In addition to not choosing a business type that provides the entrepreneur with adequate legal protections, new business owners may also choose the wrong business structure.
There are distinct differences between partnerships and corporations and LLCs. In addition, a general partnership is very different from a limited partnership. In the former, one partner is liable for the other partner’s misdeeds, whereas that liability is limited in the latter. Because of these differences, most new business owners would benefit from seeking legal advice before making a choice.
Seeking Legal Advice from an Accountant
While it may be tempting to seek legal advice from an accountant due to his or her knowledge of corporate issues, the accountant may not be aware of some of what a legal professional is more likely to know. Moreover, lawyers and accountants offer different advice, and accountants cannot offer legal advice. An accountant may advise an entrepreneur to choose a business structure based on tax advantages, whereas a lawyer may advise choosing a structure that provides the owner with effective liability protections. An experienced lawyer at Polymath Legal PC can help new entrepreneurs avoid common legal mistakes with comprehensive legal advice that an accountant cannot give.
Avoiding the Correct Documentation, Bank Accounts, and Other Formalities
Some entrepreneurs may decide to start a business and employ family members to assist them. Regardless of relation, it is still necessary to create the correct governance documents, including articles of organization, articles of incorporation, bylaws, stock certificates, and consents, depending on which business structure the entrepreneur decides to adopt. Moreover, entrepreneurs who want to partner with someone else require further documentation, including a partnership agreement. Due to the need for this documentation, a new business owner can benefit from seeking legal advice to help ensure that the documents are legally sound.
Additionally, even if an entrepreneur decides to adopt a business structure that prevents themselves from being personally liable for the business’s actions, they can lose this protection if they fail to separate the business bank accounts from personal accounts. A new entrepreneur must avoid any actions that suggest that the business is not a separate entity.
Not Taking the Time To Create Effective Contracts
While having no contracts at all is not advisable, using online contract templates can sometimes be worse. For instance, not properly reviewing these documents might expose the business to unintended issues, as contract templates are unlikely to be specific to the entrepreneur’s business. Additionally, the contracts may contain legal jargon that the entrepreneur may not fully understand. Therefore, seeking legal advice for contract creation or review can help entrepreneurs avoid entering into a contract that is not beneficial.
Not Considering Intellectual Property, Cybersecurity, and Privacy
Many entrepreneurs fail to understand that their intellectual property (IP) is one of their key assets. Due to this, they may not seek adequate protection for their IP. Moreover, an entrepreneur must ensure that his or her business is not infringing on another business’s intellectual property, as the consequences can be very costly.
In addition to IP, many entrepreneurs do not consider cybersecurity and privacy issues adequately. Many businesses encounter data breaches at some point. While large corporations can afford to pay fines that result from these breaches, the same costs may lead a smaller company to permanently close. Due to this, it might be necessary to comply with certain international, federal, and state data protection laws. For small business owners, a good starting point is to review the advice from the Federal Trade Commission for helping small businesses mitigate cybersecurity risks.
Failing To Consider Employment and Labor Laws
Failing to consider employment and labor laws is all too common and costly for new entrepreneurs. For instance, some entrepreneurs may staff only independent contractors so they can avoid paying employment taxes. Additionally, they might put all staff members on a salary to avoid paying any overtime. Despite these attempts to save money, they might contravene several local, state, and federal laws.
An Experienced Business Lawyer Can Help
If you are establishing a new business, contacting a lawyer at the start can help you avoid common legal mistakes. To ensure that your new business venture is legally compliant, consider contacting an experienced attorney at Polymath Legal PC by calling (833) 931-6418 to schedule a consultation today.