Starting and running a small business can be a challenging task. With so much to do and manage, we often can overlook or underestimate the importance of legal compliance. This can lead to costly legal mistakes that can threaten the very existence of the business. Let’s discuss the five most common legal mistakes we have seen here at Bounds Law that small business owners make and some tips on how to avoid them.
- Failing to Incorporate or Form an LLC
One of the most common legal mistakes small business owners make is failing to incorporate or form a limited liability company (LLC). I am not sure where this information comes from, but we hear businesses say all the time, “Oh, I thought I did not need to get an LLC until I was making 6-figures.” This is just PLAIN WRONG. Without incorporating or forming an LLC, the business owner is personally liable for the debts and obligations of the business making $10 or $100k dollars. The public – nor the law – cares how much money you make and you’ll be just as liable if an accident occurs under your watch. This means that if the business is sued or goes bankrupt, the owner’s personal assets, such as their home, car, and bank account, are at risk.
To avoid this mistake, it’s essential to incorporate or form an LLC (or some other legal entity that protects you as recommended by a professional). Incorporation or formation of an LLC limits the business owner’s liability to the assets of the business, protecting your personal assets. - Poor Record-Keeping
Small business owners often neglect to keep accurate and complete records. Poor record-keeping can make it difficult to monitor the financial health of your business and can lead to legal troubles with the IRS. Keeping accurate records is essential to making informed business decisions and avoiding tax and legal problems.
To avoid this mistake, make sure to keep accurate and complete records of all financial transactions. Here, we love to store all our records in cloud based program (and would recommend it for you too). So, save those invoices, receipts, bank statements, and tax filings. Consider hiring an accountant or bookkeeper to help you manage your finances. - Misclassifying Employees
Ugh, this is one of the worst mistakes we see here at Bounds Law and the damage can mean thousands in fines for the small business. Don’t make the mistake of misclassifying your employees or contractors. Classifying workers as independent contractors instead of employees can lead to costly legal consequences, including fines and back taxes. It’s important to understand the legal criteria for classifying workers as employees or independent contractors. This criteria is highly fact-intensive and can be based upon your state law. If you have any doubt, you should consult with a professional. - Not Having Employment Handbooks & Policies
Small business owners often fail to have written Employee Handbooks & Policies with their employees. This can lead to disputes over compensation, job duties, termination and days off. Handbooks and policies can help avoid misunderstandings and provide clarity about the terms of employment.
To avoid this mistake, make sure to have clear Employee Handbooks and Policies with your employees. Consult an attorney to help you draft them so that they comply with your state and federal employment laws. These are crucial whether you have 1 or 100 employees. - Failing to Protect Intellectual Property
Small business owners often neglect to protect their intellectual property, such as trademarks, copyrights, and patents. This failure can lead to costly legal battles and loss of business reputation. To avoid this mistake, make sure that as early on as possibly you register your trademarks and copyrights and apply for patents (when they apply). Some of these even have really costly deadlines that you have to meet (ugh!). Consult an attorney to help you navigate the complex process of protecting your intellectual property.
Avoiding these common legal mistakes are crucial to the success and longevity of your small business! Bounds Law is here for you when you’re ready!
