Starting a business is an exciting time, but it’s also filled with potential legal pitfalls that can unravel everything before you’ve even opened your doors. Many entrepreneurs unknowingly make critical legal mistakes that can lead to lawsuits, fines, or even the dissolution of their business. If you don’t take the proper legal steps from the start, your business could face challenges that are difficult—and expensive—to recover from.
Before you dive headfirst into your new venture, make sure you’re not overlooking these 7 legal mistakes that could destroy your business before it even begins.
- Choosing the Wrong Business Structure
Why It’s a Mistake
One of the most important decisions you’ll make is choosing the legal structure of your business. Many new business owners default to a sole proprietorship because it’s the easiest to set up. But while it’s simple, a sole proprietorship leaves you personally liable for the business’s debts and legal issues. If your business is sued, your personal assets could be at risk.
How to Avoid It
Consider forming a Limited Liability Company (LLC) or a Corporation, both of which provide personal liability protection. These structures separate your personal and business assets, protecting you from business-related lawsuits and debts. Consulting with a legal professional will help ensure you choose the right structure for your business’s long-term needs.
- Failing to Secure a Trademark for Your Brand
Why It’s a Mistake
You’ve come up with the perfect business name and logo, but failing to secure a trademark leaves your brand vulnerable. Without a trademark, anyone can legally use your business name, and if they trademark it before you do, you may be forced to rebrand entirely.
How to Avoid It
Register your brand’s name, logo, and any other unique identifiers with the United States Patent and Trademark Office (USPTO). While it may seem unnecessary early on, protecting your brand through a trademark ensures that no one else can use your business identity, helping you avoid costly disputes and potential rebranding.
- Overlooking Local Permits and Licenses
Why It’s a Mistake
Many new business owners think that registering their business is enough to start operating. But in many locations, you’ll need additional local permits or industry-specific licenses to legally operate. Failing to secure the proper permits can result in fines, penalties, or even having your business shut down.
How to Avoid It
Research the permits and licenses required for your business at both the state and local levels. Depending on your industry, you may need permits related to health, safety, zoning, or even environmental regulations. It’s better to invest the time upfront than face fines or forced closure later.
- Not Having a Written Partnership or Operating Agreement
Why It’s a Mistake
If you’re starting a business with a partner, it’s tempting to rely on verbal agreements or informal understandings. But what happens when disputes arise or a partner wants to leave? Without a written partnership or operating agreement, your business could fall apart due to misunderstandings and disagreements.
How to Avoid It
Draft a formal partnership or operating agreement that clearly outlines the roles, responsibilities, and ownership stakes of each partner. Include details about profit distribution, decision-making processes, and exit strategies. A strong agreement can save you from costly disputes and ensure that your business runs smoothly even if conflicts arise.
- Ignoring Employment Laws and Misclassifying Workers
Why It’s a Mistake
As your business grows, you’ll likely need to hire employees or contractors. Misclassifying workers as independent contractors instead of employees to avoid taxes and benefits is a common mistake that can lead to significant legal trouble. The IRS and Department of Labor are strict about how workers should be classified, and missteps can result in penalties, back taxes, and lawsuits.
How to Avoid It
Ensure you’re complying with federal and state employment laws by properly classifying your workers. Employees are generally subject to more control over their work schedules and tasks, whereas independent contractors have more flexibility. If you’re unsure, consult with an employment lawyer to avoid costly misclassification issues.
- Failing to Protect Other Intellectual Property
Why It’s a Mistake
Your business’s intellectual property (IP)—whether it’s a product, design, or unique process—is one of your most valuable assets. If you don’t take steps to protect your IP, you could lose control of it entirely. Competitors may copy your work, steal your ideas, or profit off your creations, leaving you with little legal recourse if you haven’t taken the necessary steps.
How to Avoid It
Identify what parts of your business need IP protection, such as patents, copyrights, or trademarks. Consider filing for a patent if you’ve invented something unique, or a copyright if you’ve created original content or designs. Using trade secrets can also be an effective way to leverage your IP when working with third parties also. Protecting your IP ensures that your creations remain yours and prevents others from profiting off your hard work.
- Overlooking Tax Obligations
Why It’s a Mistake
Paying taxes is an inevitable part of running a business, but many new business owners underestimate their tax obligations, leading to unexpected bills, penalties, and interest charges. Failing to set aside enough money for taxes or missing key tax deadlines can cripple your business’s cash flow and expose you to IRS audits.
How to Avoid It
From the moment you start earning revenue, make sure you understand your tax obligations. This includes federal and state income taxes, self-employment taxes, sales taxes (if applicable), and any other local taxes. Set aside a portion of your earnings for taxes, and consider working with a tax professional to ensure you meet all filing deadlines and avoid costly penalties.
Conclusion: Protect Your Business by Avoiding These Common Mistakes
Starting a business is exciting, but the legal mistakes you make in the early stages can have long-lasting consequences. By understanding and avoiding these common legal pitfalls—choosing the right structure, securing your brand, obtaining necessary permits, and complying with employment and tax laws—you’re setting your business up for long-term success.
Don’t let preventable legal issues derail your business before it even begins. If you’re unsure whether your business is legally sound, contact Hiatt Law today for legal guidance. We’ll help you navigate the complexities of business law and protect your company from costly mistakes.