Startup Slip-Ups: 5 Common Legal Mistakes Entrepreneurs Make (And How to Avoid Them)

Posted August 15, 2023 by in Career

We all make mistakes. Most of the time, they’re easy enough to resolve. However, that’s not always the case in the business world. In fact, business mistakes can be costly and time-consuming to fix. 

The best way to address such mistakes is by not making them in the first place. That’s why, in this article, we’re going to fill you in on five of the most common legal mistakes new business owners make. By the end of the article, you’ll be in a solid position to avoid these potentially catastrophic errors. 

Not Prioritizing Contracts

Handshake agreements were once common practice. We took people at their word, and it was enough to ensure a robust business relationship. That’s no longer the case. Without contracts, you risk a range of legal ramifications that could impact the future of your enterprise. 

Thankfully, you can avoid such legal problems when you hire a business lawyer. They can advise on the most appropriate contracts for your startup to ensure it has all the necessary protections. These can include employment agreements, vendor service agreements, and non-disclosure agreements that protect your business interests. 

Not Understanding Your Tax Obligations

Many entrepreneurs fail to understand their tax obligations, placing them in strife with the IRS. Not being aware of your tax obligations can result in penalties, fines, and liabilities you weren’t expecting. These penalties can be so significant that business owners struggle to find a way out. 

You can’t safely avoid taxes. However, you can avoid the problems associated with them. Meet with a business lawyer to work through your new tax obligations. You may also wish to contact a trusted accountant who can manage your business taxes on your behalf.   

Not Creating an Operating Agreement

Many successful entrepreneurs never anticipated reaching the heights they did. Before long, their passion turns into a profitable business, and they’re welcoming new partners, directors, and employees. 

Fast growth can cause critical legal obligations to fall by the wayside, such as operating agreements. These agreements are in place to identify everyone’s role within a business and how much power they hold. They provide a roadmap for daily operations and are also crucial for ensuring everyone is on board with how salaries are handled. 

If you haven’t yet created a detailed operating agreement, now’s the time to get going on it. Your chosen business lawyer can assist with this process.   

Not Choosing the Correct Business Structure

There is much to consider when launching a startup for the first time. Ensure you put ‘choosing the correct business structure’ at the top of the list. 

The type of business entity you have can determine the taxes you pay, your daily operations, and even whether your personal possessions are at risk during challenging financial times. There are many options to choose from, including: 

  • Sole Proprietorship
  • Partnership
  • Limited Liability Company (LLC)
  • C, S, and B Corporations
  • Closed Corporation
  • Nonprofit Corporation
  • Cooperative 

Contact your chosen business lawyer for advice if you’re unsure about the most beneficial entity for your unique business model. 

Not Protecting Your Intellectual Property Rights

It’s easy to assume that no other business would dare copy your products, services, technology, or innovations. However, they are within their rights if it has profit potential and isn’t protected. 

That’s why seeking patent protection can be so crucial for startups. As soon as you file for patent protection, you’re protecting what’s rightfully yours. 

Making legal mistakes is easy when you’re new to the business world. Thankfully, you can put your business in a strong position to succeed by avoiding the common but costly mistakes above. 

Read more: