5 Common Legal Mistakes Of Small Business Owners

Entrepreneurs are some of the busiest people in the world, especially in the early days of a small business. There are countless concerns and considerations that go into developing, building and managing a successful business from product development to marketing to customer service and everything in between. With a constantly full plate and an ever-growing to-do list, small business owners will inevitably overlook some elements of business when starting out.

Unfortunately, many of these overlooked aspects are in the legal realm, and failure to understand and observe the many legal elements of a small business can have serious repercussions. Far too many entrepreneurs make the mistake of ignoring legal policies or issues until a problem arises, and this can sometimes be too late.

This article will go over some of the most common legal mistakes that small business owners make, focusing specifically on new startups. Although the early days of a business are usually when thorough legal practices are most important, the vast majority of mistakes and failures occur in the first two years of operation. Hopefully, you can learn from the mistakes of others and avoid serious legal issues for your small business going forward.

1. Choosing the wrong business structure

There are several options for a business structure, and each has its own specific benefits and drawbacks. In the earliest stages of your startup, you should research the differences between them and ask for the help of more experienced entrepreneurs. It may also be wise to get with a legal expert before making your choice and learning which is best for your business. Your initial options will include:

  • Sole proprietorship
  • Partnership
  • LLC
  • S corporation
  • C corporation

2. Failure to protect intellectual property

Far too many entrepreneurs fail to get the proper protection for their intellectual property until it is too late. Whether you have specific trade secrets, formulas, concepts, logos, mottos or any other intangible asset, there is nothing to stop competing businesses from stealing these assets unless you take the steps to protect them. In the U.S., there are three instruments for protecting intellectual property:


  • Patents protect new ideas, concepts or inventions. This also includes unique improvements to any current techniques or concepts.
  • Copyrights protect the expression of ideas, such as literary works, video compositions, computer programs and other such works.
  • Trademarks protect the words or symbols that identify a certain brand and/or distinguish it from other brands, such as logos or mottos.


3. Failure to properly utilize contracts

Anytime you purchase products or employ the services of outside vendors, you need to establish clear business guidelines with a written contract. This includes anyone who is not directly within your company. Failure to establish proper legal policies can hold you liable for anything from plagiarized material from a freelance writer to truck accidents by product vendors. If you are unsure of how to create an effective contract, you could download standard templates online or seek legal help from experts like those at the Doan Law Firm.

4. Failure to understand and follow tax laws

No matter the size or location of your business, tax law is a complex system that is difficult for any inexperienced person to comprehend. You need to know what taxes your business is subject to pay, how much should be remitted, when taxes should be filed, how often to make payments and countless other considerations. This is where a knowledgeable and experienced business accountant can be invaluable for a new company.

5. Ineffective (or lack of) human resources policies

Your company is legally obligated to maintain copies of certain documents on file for each and every employee you hire. Failure to do so could have serious consequences, up to the closing of your business or even jail time for certain offenses. In addition to legal documentation, you should develop and maintain employee manuals with guidelines and policies for every situation and contingency.


Almost all of these problems– as well as many others– can be avoided if you hire a legal expert early on in establishing your company. You should also seek out the services of experienced accountants, human resource professionals and others who can help establish and manage the details of your company and help you avoid potentially dangerous mistakes.

FG Editorial Team
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