5 Common Legal Mistakes that Can Hurt Your Small Business

5 Common Legal Mistakes that Can Hurt Your Small Business

Small businesses face several challenges, including trying to break even, establishing customer loyalty, branding, and marketing. There are small business mistakes made in these areas, but they can easily be overcome with the right skill set and objectives.

Legal mistakes, on the other hand, go unnoticed but later come back to hurt the business. Most business owners tend to make contract law mistakes, which end up being fatal to the firm.

Here are 5 common legal mistakes that could end up hurting your business.

Right Legal Structure

Most small businesses develop from the motivation to do something, or friends doing activities that bring in some form of monetary value. Such a social approach to business results in overlooking business structures, which are crucial for growing businesses. Establishing a legal structure dictates taxes paid, necessary paperwork, and liability in lawsuits.

Small businesses co-owned by friends should be able to register as partnerships. Such actions will establish how they share losses and profits in relation to their contributions. Assumptions that each partner will be fair to the other are shortsighted, and end up hurting the business more.

Lack of Protecting Intellectual Property

Small businesses come up with unique products that may bring in significant profits if well managed. They go further to create brand logos to identify their businesses. One of the mistakes small business owners make is they ignore patenting, trademarking, and obtaining copyrights. Without such documents, other people can benefit from the business without legal implications.

There have been cases where an entire company has collapsed after the rights to the idea were stolen. Another person just copied the business idea and registered it. Small business owners should always patent a product, copyright an idea, and trademark their brand.

Shareholder Agreement

Some businesses grow fast and have shareholders at an early stage. It is a good sign for a firm, but the shareholders make one major mistake in contract law by not reaching a shareholders’ agreement. When registering a company, the agreement is not a legal requirement but is as vital as all other documents.

The agreement stipulates the conduct of shareholders towards each other in the business. Disagreements are expected when everyone has some level of power. Having a guideline on how to amicably reach an agreement helps avoid escalating a problem. It also prevents the development of camps in the business due to conflicting ideologies.

Wise Investor Choice

When starting a business, one mistake business owners make is to assume that all the business needs to grow is money. Such assumptions cloud their judgment when selecting an investor. The more the money an investor puts into a business, the greater their expectations.

Outside investors are particularly problematic in the event of disagreements, which commonly occur. They are more experienced in business and may not like how you run your business. If they threaten a business with a legal suit, the small business owner stands to lose more since they do not have the money to engage in legal battles. It is paramount for business owners to make a careful selection of investors.

Federal Payroll Taxes

Small businesses often forget or make a conscious decision not to make federal tax payments to the government. Reporting income and federal taxes is a business requirement and failure to do so results to a contract law mistake. If the company does not submit payroll taxes or present W-2 form to employees, it may incur severe penalties. A small business will collapse if the IRS opens a criminal investigation against it for failing to remit taxes.

It is important for small businesses to seek legal services at the start of the firm and during growth. Attorneys will provide sound advice on legal issues that may affect the business, both in the short and long run. This will help in avoiding the common legal mistakes in business.


5 Common Legal Mistakes that Can Hurt Your Small BusinessPatrick Watt was a legal officer with an MBA degree and years of experience with various companies. He is now a full-time writer in law and business dispute niche. He writes for Carter Capner Law, a progressive, innovative and strongly motivated law firm based in Queensland, Australia.