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6 costly legal mistakes that startup businesses make

On Behalf of | Sep 18, 2017 | Business Law

When launching a business, owners have a host of things on their “to do” list. There’s product development, marketing, sales, computer equipment and a host of other concerns. Legal issues seldom make the list, and if they do, they’re not at the top. It’s no surprise, then, that small-business owners often make legal mistakes.

Here’s a list of mistakes people make when starting a business.

1. Failure to write a comprehensive partnership agreement. It’s absolutely crucial that partners have a crystal clear understanding of the business and their role in it, according to Forbes. Partnership agreements should address:

  • Ownership percentages
  • Roles and responsibilities
  • Expectations for how much time the partners will spend on the business
  • Decision-making authority
  • Assets that partners are investing in the business
  • Salaries
  • Removal of a partner
  • Death of a partner
  • Divorce of a partner
  • Sale of the business

This is just a partial list of the issues that can be covered in a partnership agreement.

2. Failure to select the proper legal structure for the business. Business owners have a variety of choices — sole proprietorship, limited liability corporation, S corporation, C corporation, limited partnership and others. Making the wrong choice can have severe tax implications in the future.

3. Failure to know and/or follow state laws. Many people are aware of federal laws, but they’re not familiar with state and local laws that could affect their business.

4. Failure to follow the law regarding the sale of stock. Securities law is complicated, and the concepts are foreign to many small-business owners. The legal ramifications of making mistakes with the sale of securities are enormous.

5. Failure to have a base contract that the business can use with clients and vendors. Businesses are built on contracts, and it’s important for every business to have a “base” contract it can use. Examine standard contracts for your industry and create a template that you can adapt for various situations. To make sure your contracts protect your business’s interests, consult with a business lawyer.

6. Failure to select a name you can “own.” You do not want to pick a name and later find out another business already has it trademarked. Thus, it’s important to do research into trademarks, domain names and legal names.