As a business owner, you’ve probably dealt with your fair share of legal questions and problems over the years. It’s inevitable, and it’s usually a headache to deal with. But, it’s essential that you don’t overlook your legal issues and make costly mistakes. Legal mistakes can come back to haunt you down the road and they are time consuming, stressful, and above all, expensive to deal with.
Top 3 Common Legal Mistakes Made By Business Owners
Legal mistakes can be devastating to a business, costing thousands of dollars to fix, causing unnecessary lawsuits, or even leading to the outright failure of your company.
The following article details three of the most common legal mistakes made by business owners along with tips for how to avoid them.
1. Not Limiting Your Liability by Forming an LLC or Corporation
If you haven’t already protected yourself by forming a limited liability entity, you’re making a mistake, and one that could cost you big time.
Forming an LLC or corporation should be the first thing you do when you start conducting business. You never know what can go wrong. When something does go wrong, you want to make sure that you don’t have to pay for it with your personal finances.
LLCs and corporations provide a shield of limited liability. This means that all liability falls on the company itself, and not on the business owners. If you don’t have limited liability protection, your own bank account, house, car, and other assets could be seized to pay off creditors or judgments if the company is sued.
So if you are currently operating your business as a sole proprietor or partnership, meaning you didn’t file any documents with your secretary of state, it’s highly advisable to protect yourself by establishing an LLC or corporation as soon as possible.
2. Not Having a Formal Agreement Between the Owners
If you don’t have a formal, written agreement in place between every owner of your business, you’re making a huge mistake.
You obviously trust your co-founders enough to start a business with them, so it might seem like nothing could ever go wrong. But times change and people change, and you’ve got to prepare yourself.
Fast-forward a few years into the future and you could be looking at a very different business situation. Your company could be making millions of dollars, or you or one of your partners could have a terminal illness and not be able to continue working. In either case, whenever situations change drastically like this, disputes are more likely to occur.
If you have a well-written legal agreement between owners, these disputes are easy to resolve and you are far less likely to end up in an expensive lawsuit. So take the time now to protect yourself and your company by formalizing an agreement between every owner of your business.
It should clearly explain who the owners are, what percentage of the company they own, what their responsibilities are, what happens if a founder passes away or leaves the company, how major business decisions will be handled, etc.
3. Not Hiring a Lawyer for Guidance
If you’re trying to handle all your business legal work on your own without guidance from a lawyer, you are making a mistake.
Entrepreneurs are inherently “do-it-yourself” types. But this tendency can lead to disastrous problems when it comes to handling legal matters.
Sure there are websites like LegalZoom and Rocket Lawyer to provide cheap, do-it-yourself replacements for lawyers. But these sites have serious drawbacks because it is against the law for them to provide any kind of legal advice.
What that means is that they cannot tailor their documents and services to your needs. They cannot advise you of the proper course of action. So you’re left with generic legal documents that may or may not be right for your business, and no way of knowing what problems you might be causing for yourself.
Lawyers go through years of schooling for a reason, and that’s because the law is highly complex. Lawyers are trained to know what problems might arise before they actually do. They can help set you up to avoid these problems altogether.
If you’re doing your own legal work and using standard documents that you downloaded online, you have no idea what problems you might have created for yourself. And unfortunately, you won’t find out until it’s too late.
That’s why not hiring a lawyer is by far the number one legal mistake made by business owners. Don’t risk it and try to do your own legal work. The consequences could end up ruining your business.
Avoiding these common legal mistakes made by business owners is an important consideration in any business. By working with a lawyer, you will get the advice you need to conduct your business properly. You will reduce your liability, decrease the likelihood of disputes and lawsuits, and ultimately increase your chances of success.