5 Common Small Business Legal Mistakes To Avoid
We can’t forecast every possible legal risk, but these are 5 most common small business legal mistakes that catch most businesses.
Nobody wants legal trouble. Ever. That’s as true in business as it is in personal life. A legal battle is expensive and time-consuming – it may even be enough to sink your business. The good news is that you can avoid a lot of legal issues by preparing yourself in advance; avoiding a legal problem is a lot easier and cheaper than dealing with it when it happens! We can’t forecast every possible legal risk, but these are 5 common small business legal mistakes.
1. Failing to Prepare for Employment Issues
It’s really exciting when your business grows enough that you need to hire staff. And that growth probably also means you have a lot on your plate. It’s easy to take on an employee or two without doing your homework, but that can set you up for serious legal trouble down the road.
Excellent employees will help you get your business off the ground, while subpar employees can undermine even the best business efforts. In the worst-case scenario, bad employees can become legal liabilities. You may run into trouble with harassment, union regulations, and other legal issues that can take a ton of time and money to resolve.
How can you avoid this problem? Do your homework! You need to know the laws in your area that govern hiring, managing, and dismissing employees. You also need to know federal, state, and local regulations regarding overtime wages, health and safety requirements, and relevant industry requirements. Make sure you’re completely in line with all of those rules and have clear documentation in place to show it.
Keeping up with the law is a good start, but a comprehensive legal strategy should go further. That means creating an employment policy and making sure your employees are very familiar with it. At the least, it should cover the terms of employment, employee rules (for conduct, dress, etc.), disciplinary procedures, and procedures for filing and dealing with complaints. Make sure every employee gets a copy and signs a form stating that they’ve received it – that can offer you protection later on if an employee claims they didn’t know about the policy.
Finally, make sure you address any employment issues quickly, especially if they relate to harassment or discrimination. Allowing issues to drag on is not only bad for morale and business, but it can open you up to liability for failing to protect your employees.
2. Lack of Succession Planning
Do you have a plan in place for who will take over your company when you leave, pass away, or retire? You should. It’s easy to get caught up in running your business now, but you need to consider what will happen when you’re gone. Accidents happen, so you need to have a plan in place. This is important for any business but is particularly crucial for small businesses. As a founder, you’re used to doing all the tasks and you know more about the business than anyone else. If you leave without a clear plan in place, it will be very difficult (if not impossible) for anyone else to step in and take over. Worse, there may be questions of inheritance or fights over who should take control, which can leave your business in disarray through complicated and expensive legal battles.
Many small business owners want to leave their businesses to their children. That’s a great plan if your children are interested, but you also need to account for the fact that they may not have the interest or ability to take over. Make sure you talk to your children early. Make sure they know about the business and that they have the option to take over. Whether they’re initially interested or not, you’ll need a policy for how to fill the top spot in an emergency. That means outlining a procedure for either an heir or an outsider to step in and making sure that you have clear records of what’s going on – that make the transition as easy as possible.
Succession planning often benefits from a strong Board of Directors, ideally with outside directors. They can help keep the company on track during the transition process and they can help make decisions that are in the best interest of your heirs and shareholders.
This kind of planning takes specific legal forms and processes, so it’s not enough to tell your children or your Board of Directors what you want. You’ll need to sit down with your attorney and draft a formal plan for what happens when you’re no longer at the helm. That may mean a child or heir taking over, an outside manager stepping in (permanently or temporarily), or a sale of the business, among other options.
In addition to a plan for the business, you’ll need a personal estate plan to set out what will happen to your equity. You may want to put it in trust for your children or grandchildren, donate part of your ownership to a worthy cause, or sell everything and disburse the cash. Sit down with an attorney and make those plans in advance – and make sure you notify your heirs.
3. Trying to “DIY” Complex Legal Matters
We know that hiring an attorney is expensive – those hourly fees and retainers add up quickly. While Google allows you to search most legal questions and even find legal forms online, remember that there’s a reason it takes 3 years of law school and a grueling exam to qualify as an attorney. You might use Google to get a sense of whether your ankle is broken or just sprained, but you’d go to the doctor for the actual treatment. In the same way, you may use a quick Google to get an idea of where to start and what potential issues may come up, but you need a qualified business attorney to handle your legal needs.
Every business can benefit from the help of an attorney to set up the business properly, create an employment policy, draw up a succession plan, and flag tax and accounting questions in advance. An attorney can also help you trademark your business name and logo to protect your reputation (and make sure you’re not violating copyrights or trademarks yourself). If you’re a contractor or work with detailed contracts, a business attorney can help you draft and formalize your contracts. If you’re trying to set up a corporate or partnership, your attorney can assist with the necessary documents, tax advice, and relevant filings.
Start a relationship with a business attorney as soon as possible after starting your business. And whenever you’re worried that a legal issue is looming, pick up the phone and check in. They can tell you whether you’re worried over nothing and if there is a real concern, they can help you head it off at the pass.
4. Working on the Basis of a “Handshake Deal”
Contracts can be dense, complex, and full of legalese. They can also be expensive and as a small business owner, you’re often working with vendors and contractors that you already know. So, it may seem easier to work with vendors or contractors under a “handshake deal,” as opposed to formalizing a written contract.
Never, ever work without a written contract.
In theory, an oral contract may be enforceable in court if it’s a short-term contract. In practice, however, you’re going to end up in a “he said/she said” fight and there’s no guarantee you’ll get a good outcome. A written contract, on the other hand, forces both parties to consider every aspect of the deal and helps make sure everyone understands what they’re signing on for.
Not every contract needs to be a massive legal production; you can work with your lawyer to draft a few standard template documents that you can customize for different vendors, contractors, etc. A clear contract can help you avoid the kind of disputes that turn into legal troubles in the first place. And if you do end up in court, a clear contract will help make sure that the deal is enforced.
5. Keeping Sloppy Records
Ask most small business owners about what their days are like and the universal response may be “BUSY.” When you’re the boss, there’s a lot on your plate. Note -keeping and updating records may be a chore that falls by the wayside. The problem is that sloppy record keeping can expose you to future legal problems.
If you’re incorporated, then properly keeping your records is vital to preserving your protection from liability. Even if you’re just a sole proprietor, vital record keeping is important if you ever plan to sell or expand your business.
Proper recordkeeping is especially vital when it comes to accounting practices. One of the easiest ways to get yourself in legal trouble when it comes to taxes is by commingling business and personal funds or failing to account for your income and expenses. When it comes to financial records, it can be well worth your while to outsource them to a bookkeeper. They can handle the minutiae (and the complexities of payroll) and leave you free to manage your business.
In addition to financial records, you need to keep clear records of your contracts and your employment practices/issues. Creating a contract isn’t going to help you if you can’t find it. And if employment issues come up, you’ll need to be able to pull up records to show what actions you took, when you took them, and what the outcome was.
Stay Out of Court
Your business is important to you and you want to run it the right way. That means protecting yourself from common small business legal mistakes wherever possible. Take the time and the cash to make sure everything is set up the right way – that can save you a lot of time, money, and anguish in the future.