Unfortunately, most early legal problems aren’t unique among small business owners. Too often, entrepreneurs make early mistakes that can lead to costly legal problems later on. As lawyers, we have seen many of the same recurring legal problems faced by small business owners and start-ups. Here are the top ten legal problems small businesses are likely to face in the first year of operation:
Improper Legal Structure
Failing to incorporate or using the wrong business structure can leave you open to lawsuit liability and higher taxes. What does this actually look like? Paying out of your own savings or losing your home when someone gets injured on your business property or if your company truck is in an accident. To avoid this potentially devastating problem, be sure to explore your incorporation options including the formation of a limited liability company (LLC). Failing to lay the proper legal foundation could cause your business to go under.
Employee and HR Conflicts
Even if you have only a few employees your first year, you will want to make sure you follow state and federal employment laws. A discrimination or sexual harassment lawsuit can be a serious setback to any new business owners. Consulting with an HR professional to develop policies can help to prevent employment related liabilities. Consider the potential legal complications related to hiring, contract formation, stock options, termination, inter-employee relations, policies on time off, privacy, wage and hour laws, right to work, discrimination, pregnancy, and health care.
Inadequate Founders’ Agreements
It is critical to set forth your plans, obligations, and other critical operational details with your co-founders. You must have a meeting of the minds and make sure that your founder agreement reflects your conversations and discussions. Be sure that you are on the same page and sign a founder agreement that makes your dealings legally binding. Problems can arise when founders fail to set forth who gets percentage of the company, the responsibilities of each founder, salaries, day-to-day operations, time commitments, the overall vision for the business, and plans for conflict resolution.
Business owners will have a host of tax responsibilities that can result in fines or even criminal penalties if not handled properly. One of the most common legal problems for small business owners is failure to remit payroll or sales tax to government agencies. You must collect payroll and sales taxes. Failure to turn over this money to state and federal agencies could result in the total loss of your business. Use a payroll service to remit these taxes automatically and set up a separate business account to collect sales and use taxes.
Intellectual Property Infringements
So, you started selling your own product but never got a patent, copyright or trademark? Maybe you forgot to check if there was already a patent on a similar product? Failing to perform due diligence related to intellectual property laws can leave you open to liability or open up your own company to potential infringements. Founders and investors are at risk when a company fails to protect its intellectual property. A patent can prevent third-parties from making or selling your protected product. A copyright will protect individual works of art, advertising copy, software and other original works of authorship. A trademark will protect the symbolic value of a word or symbol used to identify your goods or services.
Unfavorable Contract Term
Every contract you enter into will have long-term implications for your business. Be wary of signing away your rights with vendors, customers, property owners, new clients, and other third parties without having your contract reviewed by an experienced business attorney. You should also have standard contracts when dealing with your customers or clients that include favorable terms tailored to your individual business. Key information related to pricing, payment terms, dates, and penalties should be clearly visible to both parties. Minimize warranties, liabilities, and other promises to avoid potential litigation. A dispute resolution clause could also prevent lawsuits and steer conflicts towards arbitration or mediation.
Selling stocks, partnership interests, and LLC interests are one of the primary ways that start-ups and new businesses can raise capital. Remember that these sales will be subject to state and federal securities law. What is securities law? Securities laws require that the transactions follow strict disclosure and filing laws. Any violation of securities laws could result in significant penalties and fines. Securities lawyers can help to draft necessary documentation for the sale of shares to ensure compliance with the law.
Non-Compete Agreement Violations
So you decided to branch out and start your own business after years in a similar industry—good for you. But, have you considered any non-compete agreements that you may have signed along the way. Some companies keep you hook on the years to protect their own investments. In practical terms, this means that you could be sued for any profits you make in competition with a former employer. Non-compete agreements will also protect intellectual property, marketing and production processes, and business strategies. Before branching out on your own, be careful of your own non-compete liabilities as well as those of other founders.
Privacy and Data Problems
Commercial business operations may need a factory or warehouse, an office space, or store front leasing. Regardless of your real estate needs to operate your business, be wary of any potential legal problems that could arise out of a mortgage, lease agreement, and land use or zoning conflicts. Consider where are your employees and customers going to park? Are you in compliance with local, state and federal land use laws? Do you have proper zoning permits? Any real estate problems your first year could be a major business setback. Consulting with a commercial real estate attorney can help you cover your bases.
Do I need a lawyer?
If you are facing a legal question or conflict, it never hurts to consult with a local attorney. If you are a small business owner or partner looking for experienced and competent counsel, consider reaching out to your professional contacts, state bar referral services, or other online legal websites.