Common Legal Mistakes by Small Business Owners

Few things require as much dedication and commitment as running a business. Ask just about any successful entrepreneur and he or she should be able to attest to this fact. This is because operating a business involves so many moving parts, and these many moving parts tend to keep moving constantly. Businesses need tax and accounting help; they need to deal with clients; they need marketing and advertising support; increasingly, they need a presence on the internet in the form of a website and social media accounts; and, they need to hire and fire employees, and provide benefits for those employees.   

Given all the burdens of running a business, owners often try to wear too many hats often in areas with which they aren’t very experienced.  This leads to mistakes, and certain mistakes can be very costly. Mistakes of a legal nature tend to be more costly than other mistakes, on the whole, and business owners must realistically evaluate their legal needs to ensure that mistakes are minimized. This is doubly true for small business owners, as the financial impact of legal mistakes usually hits small business owners more severely.

In this post, we will identify and discuss a few of the common legal mistakes that small businesses should seek to avoid.

Failure to Prepare Shareholders Agreements, Bylaws, or Operating Agreement

This is one of the most common mistakes made by small business owners. Shareholders’ agreements, corporate bylaws, and operating agreements are documents that outline how a given company functions – this means details on its management, ownership, organization, distributions and investment, employment procedures, and so forth.

In some cases, business owners prefer to wing it on a handshake or blind trust that their friend turned-business partner will be in lock-step on every important management or operational detail of the business.  The truth, however, is that running a business without governing documents can be a very costly mistake. Well-crafted governing documents can help mitigate many costly legal issues that can arise in the management and operation of small and medium-sized businesses.  

Use of Verbal Contracts vs. Written Contracts

Many business owners execute deals purely on a handshake or verbal basis; in other words, no written contracts are involved in the course of conducting business. This is especially the case with small business owners. There may be some benefits to carrying out business in this more casual or “off-the-cuff” manner, but there can be substantial drawbacks as well. Small business owners should get in the habit of using written contracts drafted by a business attorney whenever possible because written contracts more thoroughly document all the specific terms and conditions of a given agreement.

Suppose a business owner becomes involved in a dispute with a client regarding the details of a purchase order – how can the business owner establish the essential terms of the deal without a written contract? Lack of written contract may result in an inability to succeed in a breach of contract case and will no doubt prove to be a more costly endeavor if litigation is required.   

Incorrect Business Entity Selection

Most small business owners are experts in the subject matter of their business but tend to know less about the legal issues involved in forming a business, the type of entity to form, and the tax and legal implications of those choices.  Business entity selection requires attention to numerous variables – tax, liability, investment, and ownership considerations must be discussed and analyzed with business and tax counsel.  Failure to do so at the formation stage may result in higher legal expenses to make corrections to the business entity and structure later in the business life cycle.

Inadequate Compliance with Labor / Employment Laws

Another common mistake by small business owners is failure to be aware of and comply with labor and employment laws and regulations, an area of the law that is constantly changing.  Whenever a small business hires employees, that business immediately triggers a whole slew of complex rules and regulations which need to be thoroughly and absolutely observed.

There are laws at the state level, and also important laws at the federal level, such as the Fair Labor Standards Act (FLSA), the Americans with Disabilities Act (ADA), and others. The FLSA gives rules on areas such as the minimum wage, recordkeeping, and overtime. Simply put, if small business owners don’t comply with labor and employment laws, they can find themselves in court defending their business in costly litigation.  

Contact The Frazer Firm for More Information

The experienced business attorneys at The Frazer Firm counsel small and medium-sized businesses in all aspects of business formation, operations, management, and litigation.  We help solve the problems that keep you up at night.  Schedule a consultation with us today or call our office at 561-295-1551 to discuss how we can help you protect your business.