Top Five Legal Mistakes Putting Your Business at Risk

Are you currently operating a business, or planning to start a new business in 2023? Running and starting a business can be highly rewarding, but also immensely challenging. There are numerous legal requirements that should be taken into consideration within your business plan to protect yourself and your ideas from being stolen, prevent tax violations, and safeguard against financial issues. Here, we’ll address common mistakes that newer business owners make and how to avoid them.

Mistake One: Operating as a Sole Proprietorship or General Partnership

If you have a sole proprietorship or are operating as a general partnership, you could be putting yourself at unnecessary risk, as neither option provides liability protection. This means that if a mishap occurs, you, your family, and your assets are at risk of being impacted in a business lawsuit. Protecting yourself from liability as an entrepreneur is just as important as the product or service you create.

Restructuring your entity can be quite the undertaking. We recommend reaching out to an outsourced legal services provider, such as Catalyst Legal, to discuss entity options that best suit your needs.

Mistake Two: Failing to Use Formal Agreements

Formal agreements and contracts form an essential component of running a business. While it would be nice to assume that every client, business partner, and vendor you interact with is fully trustworthy, this is sadly not the reality of the business world. Even if you have never had issues in the past, it only takes one instance—such as a damaged shipment or late client payment—to put your business at risk. In instances where you are in the right, it can still be costly to prove so.

Generally, formal contracts address issues such as which party is liable for problems with transactions, purchaser remedies, and limitations on damages in the event of a default. Formal agreements are not only useful for protecting yourself, but also make executing the day-to-day tasks of your business much easier. They’re needed when applying for loans, opening a credit card, hiring new employees, renting office space, and more. Implementing formal contacts within each area of your business is a proactive measure to safeguard against disputes and issues when they inevitably arise.

Mistake Three: Hiring Contractors, but Treating Them Like Employees

Using contractors can be an excellent solution when you have additional work that needs to be completed, but are not ready to invest in a full-time hire. While contractors generally have higher hourly rates than full-time employees, you can save significantly in hiring costs, benefits, and general liability. However, many entrepreneurs make the mistake of treating contractors like regular employees.

Independent contractor misclassification can look like providing the worker identical training, workspaces, and assignments without extending benefits, minimum wage, or worker’s comp. A true contractor should be running their own business, providing their own materials, and deciding how and when they will perform the work. The relationship is also a temporary one. The consequences of misclassification can include hefty fines from the IRS, payment in back taxes, and other serious penalties.

The best way to ensure your contract workers do not become employees is to create a formalized agreement that outlines the terms of your relationship with them—then following it! This is another excellent area for an outsourced attorney to step in; they can help create the formal contract and ensure that working boundaries are clearly defined.

Mistake Four: Failing to Create Confidentiality and Non-Compete Agreements

The last thing you want as a business owner is for competitors in your area trying to poach your top employees. Or, perhaps worse, for the employee to take proprietary information, trade secrets, and business practices to open up their own competing business. A non-compete agreement is a type of NDA that places common-sense restrictions on your employees to prevent them from working for competition, or creating a business that competes directly with you. Confidentiality agreements can be a useful tool to prevent the sharing of trade secrets. It can similarly cover any information you want to protect, such as intellectual property, client lists, knowledge of business practices, financial information, or specialized training.

Mistake Five: Neglecting to Protect Intellectual Property Early On

Intellectual property can be extremely valuable, as it often forms the core of your business, and can be sold for financial gain if you ever decide to exit the business. By protecting your intellectual property, you can significantly expand the value of your assets, and ensure that competitors cannot gain from your hard work.

Intellectual property should be trademarked, copyrighted, or patented, depending on what is it. A registration provides you with additional remedies and, in some cases, may be the only way to protect your intellectual property assets. Many businesses spend tens of thousands of dollars marketing and advertising their product or service, but never stop to consider how they should be protecting their investment.

By safeguarding each component of your business, and by proactively seeking legal counsel, you can establish a strong foundation that will keep your business thriving for years to come.


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