Legal Pitfalls That Entrepreneurs Should Avoid

Even if you have an amazing and brilliant business idea, and even if you have solid financial backing, a small legal mistake can sink your entrepreneurial ambitions and dreams quickly and permanently. As all entrepreneurs learn, many times the hard way, the devil is in the details, and launching and building a business is filled with small but complex legal details.

There is a wide range of business disputes and business litigation cases in day-to-day work. In many cases, the expensive, complicated, and brand-damaging lawsuits could have been easily preventable if only the founders and CEOs took the time early in the development of their business to make smart legal choices, be thorough with their legal documents, and get great legal counsel.

Here’s where you need to start if you want to avoid the most common legal mistakes made by entrepreneurs:

Choose the right kind of entity.

Each type of business entity, from LLC to C Corporation to S Corporation, comes with distinct rules and distinct benefits. Making the wrong choice can leave you exposed to personal liability or stuck writing enormous tax checks. Choosing the right entity can protect you as an individual and help your business thrive.

Research all regulations and restrictions.

It is vital to understand whether your business, your products, or your services are subject to local, state, or federal regulations. Will your business be affected by city zoning laws? Does a government agency oversee your industry? Do your business activities require any special permits or licensing? You would be surprised how many start-ups fail to simply know and follow the rules. 

Be thorough when drafting contracts.

It may be tempting to download form contracts from the Internet or to skim contracts that others hand you during the launch of your business. These are both huge mistakes. If your contracts with customers, venders, and employees are not carefully written and thoroughly examined, it could lead to expensive and even business-killing litigation down the road.

Treat your employees fairly under the law.

Conflicts with employees inevitably happen at almost every business with more than a few staff members. You must be prepared for these conflicts by having clear employee policies, fair employee benefits, and protections against employee discrimination and injury. Also, consider drafting non-disclosure and non-compete documents for employees to sign. Lastly when firing employees don’t be afraid to tell the true reason.

Understand securities law.

Federal and state securities laws are complex and the penalties can be extremely harsh. Before you start issuing stock to family, friends, and angel investors, you need to be extremely familiar with all of the rules and regulations regarding securities. For example, you can’t sell shares of your company’s common stock without the proper disclosure documents, and you can’t issue securities to anyone who isn’t an accredited investor.

Protect your intellectual property.

Have you trademarked that logo that you spent so long developing? Or made certain that employee discoveries made at work belong to your company? Or protected your unique formulas, recipes, and processes? Intellectual property is extremely important to guard, especially if you have products that are unique or if you are in the business of making new discoveries or creations.

Hire the right lawyer.

All of the above issues can be avoided altogether if you simply find and hire the right attorney at the beginning of your journey to create a successful start-up. Choosing an attorney who has an extensive background in business law is a must. Choosing an attorney who understands your needs and knows how to stop business disputes before they start is even better. 

There are a myriad of challenges and barriers related to starting a successful business, including a large number of legal mistakes and pitfalls. Luckily, with a little help from an experienced business attorney, these mistakes can be avoided with some planning, a few well-prepared documents, and a lot of hard-won knowledge.

Kurt Smith is a 27 years old entrepreneur and writer who loves contributing on various business and law blogs. Except from writing Kurt loves traveling around the world learning new cultures and experiences.

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