8 Common Legal Mistakes That Nearly Every Small Business Makes

Going into business isn’t just about hanging a sign on the front door anymore. In an increasingly complex world, you have to protect yourself and avoid making embarrassing and expensive legal mistakes.

1. Failing To Register A Trademark

 

Trademarks protect you in the future. You may not be too concerned about it now, if you’re a young business, but eventually you may want to make sure that your brand name is protected. It’s easy to forget about trademarking a name or slogan but if someone infringes on your trademark you will want that protection.

2. Infringing On Someone’s Copyright

 

Since it’s sometimes unclear whether an image is free of any copyright, it’s best to use a paid service or check to make sure that the image is in the Creative Commons. It’s not enough to post an image or graphic and credit its author. It doesn’t matter if you didn’t intend to violate copyright law. If you’re using someone’s property without his or her permission, you’re in violation and could be sued by the copyright owner.

3. Incomplete Filing

 

One of the most common mistakes businesses make is to file Articles of Incorporation and then set the paperwork aside. This gives you no protection, from a legal standpoint, and the IRS will not recognize the corporation as a legal entity. You must also prepare bylaws, execute organizational minutes, issue shares of stock, execute key agreements, and file IRS elections (i.e. S-Election).

4. Assuming Mandatory Incorporation

 

Not all businesses need to be incorporated. It’s become almost an unwritten rule that all businesses need to be incorporated. This is simply untrue. Unless you really need the legal protection that a corporation affords you, there’s little benefit of incorporating. What you do get by incorporating is extra tax forms, additional corporate tax (if you’re a C corporation), additional record keeping, and franchise fees.

5. Using Stock As Currency

 

Paying employees, vendors, or anyone else in shares of stock ties the corporation to the new shareholder for as long as the company stays in business. If you do this with your business, think of the long-term consequences. You will be legally bound to act in in their best interest since the purpose of the corporation is to maximize shareholder value. If you don’t want to be bound by this kind of agreement, don’t issue stock as a form of payment.

6. Careless Filing

 

As incredible as it sounds, many business owners file business documents based on what “sounds good.” LLC may sound good and snappy after your business name, but does it serve your purpose? Choosing what form your business takes while chatting with a friend over drinks could be a costly mistake. For example, in New York and California, LLCs pay far more in fees and taxes than other business entities. If you choose an S-corporation, you had better be prepared to file extra paperwork for the “S” election. Make sure you are choosing the right business entity for your needs.

7. Ignoring Jurisdiction

 

Don’t just randomly choose a state of incorporation from a drop-down menu on a website. In most cases it makes sense to incorporate in the state where you are doing business. There is normally no reason to incorporate in states like Nevada or Delaware, despite what some people say. In fact, you may actually increase the legal fees by doing so while decreasing your legal protections.

8. Failing To Formalize Contracts

 

A common mistake that many business owners make is to not formalize contracts. Small businesses often have this problem when dealing with vendors and sometimes even with customers. A handshake is no way to do business. While you might be completely honest and ethical, you have no way of knowing whether your customers or vendors are.

Even if your vendors and customers are honest, you may run into legitimate disputes that require arbitration or a trip to court to sort out. A contract is the only way to protect your business and your interests.

About the Author: Guest post contributed by Hayley Spencer, on behalf of Lawyers.com, providers of legal help and resources.

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