Legal Mistakes Startups Should Avoid

Being an entrepreneurs is one of the most rewarding experiences that a person can engage in. On the other hand, it is a lot harder than most people think. Making sure you don't make any legal mistakes when you are getting started is something a lot of people ignore, but is very important. I know that 'legalese' can be intimidating and a lot of people would just like to ignore the paperwork.  It is also true that most small business people can't afford a high priced lawyer to do it for them. If this article, I would like to discuss some of the most common legal mistakes that entrepreneurs make and how to avoid them.

Incorporating Your Business

It is extremely important for any business to form a legal entity, like a limited liability company (LLC), partnership or corporation. These business entities shield entrepreneurs from personal responsibility for certain business obligations. But legal entities come with a cost, so make sure your new business is more than just an idea, and that your are ready to invest the necessary time and money to maintain the business as a separate, legal entity.

Other than a single-member LLC, all other legal formats are required to file their own tax returns and this is probably something you should have a professional do. There are also yearly fees to the state you created your legal entity in to maintain its validity. Sometimes there are local fees. Make sure to figure these necessary costs into your business plan. It is also a good idea to file legal entity documents earlier in the year, so you don?t have to pay fees twice with a few months.

Never Accept Handshake Deals

You may be going into business with your best friend and think everything will always work out fine. Then you haven't heard all the horror stories about fall-outs between friends in business. Verbal agreements are not set in stone.

When forming your business, always put it in writing. Most contracts are never disputed, and far fewer end up in court. You have to think of a business contract like a prenup: Something you hope never to need, but something to have just in case. Contracts should be well-defined and signed by all the people involved - whether that means outlining roles and ownership with a co-founder, making an offer to an employee or drafting business points with a vendor.

For all key agreements, get it in a signed, written contract. Even if it ends up in a drawer and is never seen again, it is nice to know it's there.

Paying Attention to the Technicalities

The paperwork doesn't stop when the contract is written. For instance, some of the basic tasks include: corporate duties such as meeting minutes and ownership (stock) ledgers; keeping business and personal finances separate; administrative filings, such as a statement of information; keeping business licenses up to date; and for businesses with employees and contractors, making necessary withholdings or tax reporting on Forms W-2 or 1099. These tasks may seem boring, but they are very important.

New entrepreneurs should get familiar with the requirements in their respective states. For instance, California corporations are required to fill out a simple one-page form about their company every year, the fee for which is $25. But for those who miss the deadline, the penalty is $250. Florida corporations have a filing fee of $150 a year and a late filing penalty of $400.

Put these simple tasks on your business calendar to make sure you don?t miss these important dates.

Make Sure You Know the Rules for Hiring People

There are two ways that you can hire people. The first is as a W-2 employee and the other is as independent contractor. To keep this from happening, entrepreneurs should familiarize themselves with the guidelines the IRS uses to determine employee status. Basically, the IRS looks at and evaluates the following:

  • Behavior: How does the worker do his or her job?
  • Finances: How is the worker paid or reimbursed?
  • Relationship: Is there a written contract? Is the worker's role integral to the business?

If a business treats a worker like an employee, the IRS is will be happy to classify them as such. This is a very tricky law. If you hire someone as a independent contractor, but treat them as an employee (e.g. set their schedule or tell them how to do the job), then the IRS can reclassifiy contractors to employees, and send you the bill for half of their social security/ medicare taxes - as well as penalties. So for those business owners who aren't 100% sure, consult a tax professional to get make sure you've got it right.

Don?t Forget about the Intellectual Property

Intellectual property, such as trademarks and patents, is a very valuable asset to a new business and needs to be protected. Unfortunately, this is not an easy area of the law and often leads to confusion among small business people. It has to be done correctly or someone else can steal your company's secret and ruin all your hard work. Entrepreneurs who go overboard trying to protect their intellectual property can find themselves bogged down and lost. Entrepreneurs are wise to remember that there is a common law trademark when you use it. Federal registration is a step to take when a company can afford to manage, upkeep and police their trademarks. So, don't spend the money until you are sure that the branding will work. The government does not give refunds. There are several online companies can handle the filing work, and when the time is right, a company should consider bringing in an attorney to look at the situation.

Don't Wait Until a Problem Arises

The biggest mistake an entrepreneur can make is to put off legal issues until they are being sued. The time to hire a legal professional is not when threatened with a lawsuit. Think about it. Healthy people see the doctor or dentist for preventative care and healthy businesses should do the same. Make sure you establish a relationship with a good lawyer early on in your business's lifecycle. A good lawyer should want to get to know the intricacies of a company, including your tolerance for risk. Many attorneys even often offer free or low-cost initial consultations, in order to build a long-term relationship.

New businesses can also consider legal plan options. For less than the price many lawyers charge for an hour, many businesses can get a year of coverage and a lawyer to call in the event of a problem or legal query. Educate yourself about the legal pitfalls out there to help keep your business entity on solid footing. That way you can concentrate on growing your business and be prepared for any legal situation that may come up.