Top 6 Legal Mistakes that Small Businesses Make

Now if we are business friends, I know that you aren’t making these legal mistakes, but if you’re new to the game or just put legal squarely on the back burner, you are going to want to look at this list and make sure you aren’t making any of these super common legal mistakes and putting your brilliant biz at unnecessary risk.

1. The number one common mistake is not forming a business entity.

   I totally get this one. It can seem intimidating to figure out which business entity is right for you, but, if that’s you, hop on over to my article to get clear on which is the best fit for you. It can also seem complex to register and a simple Google search will have you believing that you need to pay $$$ to have a service legally set up your business. 

   To bust a myth, you can absolutely DIY your business registration and I have some tools to help you get started. Your state business page likely has easy-to-follow steps and in most cases, the most you will pay to register an LLC is between $50-$200 depending on location.

   But why is it a mistake not to register as a business entity?

   Because depending on the entity you choose, it will provide you and your personal assets with liability protection. You WANT liability protection. If you don’t register as a business entity, you will be considered a sole proprietorship by default. That sounds fancy but it just means that you are a one-woman show and the law will treat you the person exactly the same as you the business. This is super risky because it means if your business as has any legal or financial trouble, your personal assets including your house and your car are vulnerable. In almost all situations this is too risky.

   But given, how easy LLC set-up is, you don’t have to live with that risk. Instead, you can in register as an LLC in under an hour and get yourself some Limited Liability protection, which incidentally, is exactly what the “LL” in LLC stands for. This means that your personal assets are treated separately from your business. It can also make it easier to get a business bank account, handle taxes, and just increase your credibility as a savvy business owner.

   At what point, do I need an LLC? 

   This is a very common Google search and my answer is, as soon as you go into business. When do you need an LLC? As soon as possible and before you start making any money. Your entity can only protect you effective the moment it was formed, all business conducted prior to entity formation is still at risk.

   Of course, I need to mention that there are other business entities to choose from and have articles describing them that I’ll link to, but for most small business dynamos the LLC is the easiest, most flexible, and most affordable option for protection. 

   I know that all “money Twitter” bros like to joke about people who “waste” time getting an LLC set up and it’s true that some people only like the idea of having a business and register LLCs to stall on the actual work of having a business. But that’s not you and I would not be worth my legal salt if I didn’t let you know that, in my opinion, not setting up a formal business entity has the potential to be a very costly business mistake. 

2. The number two super simple to fix legal business mistake that I see is not using solid, lawyer-drafted legal documents in your business.

   In some cases, new business owners are just so excited that someone wants to buy from them that they don’t want to pour cold water over the client relationship with a contract. 

   I know! I felt that same way when I started my first biz but here’s the thing, contracts are good for your clients and customers. They protect them as much as they protect you - or they should if you have the right kind of agreement in place. Need help with this? Check out my templates, they are all designed to provide balanced protection to you and your clients. Plus a well-written contract instantly adds to your business credibility. Your clients will see it and know that they are working with a serious professional.  And a contract that you cut and pasted from a Google Image Search or bought for a few bucks on Etsy, is not going to cut it. This means a better client experience and also more money for you because serious professionals get paid.

   Related is the mistake of not reading the contracts that you sign. If you skim the contracts that you sign on behalf of your business that is a huge issue. You need to know exactly what you are agreeing to because not reading carefully will not be a legal defense if an issue comes up. 

   Here’s the thing, sometimes contracts are so complicated that you don’t know what you read. You have two options, first, consult with an attorney, or two, ask for written clarification before you sign anything. It is always a good idea to request an editable contract so you can make language edits in the document and submit it directly. This ensures that you and your counterparty are on the same page.

   And, yes, you still need to read the contract even if you have discussed the terms verbally. Your prior conversations, whether in-person, online, or in writing, will not be binding. Your complete agreement is contained within “the four corners” of the contract that you sign. So you absolutely must read the full agreement before you sign on the dotted line. 

3. Don’t make the mistake of not behaving like your business is separate from you.

   Now if you decided to be a sole proprietorship this is less applicable. But if you are like most creatives, coaches, or consultants, you are an LLC and as such you need to act like it. This means you need to take the step of getting an EIN number and setting up a separate business bank account. Without clearly separated finances, your LLC isn’t going to actually offer you much protection

   After you get your business bank account set up, the next step to acting like a business is to make sure that you sign all agreements on behalf of your business. This means that signing with your personal signature is not recommended. Instead, be sure to indicate that you the person are signing on behalf of your business. This isn’t hard, just right “on behalf of XYZ LLC” after your signature on all legal documents.

   Another way to act like a business is to start paying yourself a salary. This helps to keep you from treating your business bank account like an ATM and creates a document trail of the business’s money being distinct from yours. And while you are at it, keep a list of any shared expenses and when or how personal items are used for the business. 

4. Seek tax advice early and get business insurance in place ASAP.

   Taxes are no one’s idea of fun but being proactive is the key to keeping your business in compliance and saving you $$$. Tax professionals can make sure that you are maximizing the protection afforded to you by your chosen business entity and can ensure that you are receiving all the tax benefits available to your structure. Tons of businesses get behind on taxes, hello quarterly filing, and then spent the next quarter or year trying to play catch up.

   Separate but related is the need to acquire business insurance. It’s great that you took steps to limit your personal liability when you formed your business entity but you definitely need to protect your business by getting appropriate business coverage. In many cases, the insurance is not super expensive and it will give you peace of mind that you are covered. In some fields, you may even be required to show proof of insurance before you can permits or even take clients. An insurance advisor can help you pick the best policy for your industry. You are working hard to grow, don’t risk it by filing “get business insurance” on your “To Do Later” list. It does not matter how profitable you are, so don’t wait.

5. Develop a healthy respect for intellectual property.

   This is a two-way street. You need to get serious about protecting your own intellectual property and you need to respect the intellectual property rights of others.

   For protecting your own intellectual property a great step is to trademark your company name or product names. However, if you are brand new to business, I’d press pause for a second so you can get a chance to see if that particular name is going to continue to work for you and resonate with customers. Sadly, some of my favorite product names just did not last. But, it is wise to perform a trademark search in the US Patent and Trademark Office database (yup, I know how exactly stoneage that website is) to make sure that no one already owns the mark that you want to protect. 

   So how do I recommend protecting your intellectual property early on in business? Make sure that you have intellectual property protection clauses in all of your written agreements and in your website terms and conditions statement. It is also a great idea to include a confidentiality or Non-Disclosure clause in any contract - especially in contracts with third-party vendors or independent contractors. If you are sharing private business information, you have to be proactive to protect it.

   A final thing that is often overlooked by entrepreneurs is the concept of Work for Hire. Work for Hire is the legal construct that the author or copyright owner of a work is not the creator but the person who contracted for it. Quick copyright lesson, typically copyright immediately vests in the person who creates a work. So a graphic designer automatically owns the copyright to the logo that they designed. That is, unless, they created the logo under a contract that contained a Work for Hire provision. This means that you, the person who paid for the logo to be developed for use in your business, own the copyright. This is super important because it provides you with the full scope of copyright protection. Can you see why it is super smart to start adding Work for Hire clauses or addendums to your contracts with third-party vendors?

   But, as I said, respecting intellectual property is a two-way street. You need to make sure you are not infringing on other creators’ intellectual property rights. This means that you will want to make sure that any images you use on your website, branded material, or social media are in the public domain or that you purchased the right to use them - this can easily be done through a subscription stock photo company. You will also want to be mindful of the music you use in your videos and be sure that you have appropriate licensure.

6. Not having business documents is the final issue that I see all the time.

   We talked about contracts in point number two but this goes beyond that. If you are a business entity, and you are, right? You’ll need some other foundational business documents in place. All businesses need Articles of Organization to be filed when your register as an entity but it goes beyond that. For example, if you and your best friend decide to open a partnership, you absolutely must have a Partnership Agreement. This document should have a clear explanation of the nature of the business, the duration of the business, who does what in the business, what happens if someone wants to leave the business, a plan for dissolution or death, and a description of who owns which assets in the event of a separation. If you have a solo LLC or a multimember LLC your LLC Operating Agreement is going to serve a similar purpose. Corporations require even more complex documentation such as bylaws, board minutes, consents, and stock certificates. Business is tough and even the best, most collaborative business owners can grow apart or have different visions, you 100% need a legal plan for how to handle the inevitable bumps in the road. 

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It is so easy to get excited about your business and get caught up in the Canva, Instagram, and website designing of it all, that boring and basic bits of building a business get shuffled off to later or even to much later. But you don’t want to wait. Make a plan to knock these six common mistakes off your “to do” list, I bet you can get them done in less than 2.5 hours!

Need more help? Check out my legal templates to help you cross numbers 1, 2, 3, 5, and 6 off your list instantly!

THIS ARTICLE IS NOT A SUBSTITUTE FOR LEGAL ADVICE AND IS OFFERED FOR INFORMATIONAL PURPOSES ONLY. EVERY SITUATION IS UNIQUE AND YOU SHOULD CONSULT A LOCAL ATTORNEY FOR ADVICE ON YOUR PARTICULAR CIRCUMSTANCES.