Common Legal Mistakes to Avoid

Column by Steve Strauss

Small businesses make legal mistakes all the time, and, while some are fairly benign, others can be disastrous. Knowing which pitfalls to watch out for can make all the difference between business success and business failure. Here then are the five most common legal mistakes that small businesses make:

Not documenting partners' rights and responsibilities

With the excitement, let alone all of the things to do when starting a business, it is easy to not clearly delineate who will do what. That can be a big mistake. Just imagine what can happen when you think that you are in charge of day–to–day operations — and your partner thinks the same thing. Founding shareholders or partners should have a written agreement that addresses the following questions:

• How much time and effort is each person expected to contribute?
• Who will do what?
• How much capital will each person contribute?
• What happens if the business needs more capital?
• What happens if one person leaves the business?
• What happens if one person dies?

Ignorance of the law

An old legal maxim, "Ignorance of the law is no excuse," is a truism. Not knowing your legal rights and responsibilities can get you into hot water. So, here is what you need to learn:

• Basic contract rules
• How to avoid being considered negligent
• How to protect your ideas and inventions via copyright, patent, and trademark law
• Basic employer–employee regulations, and
• The governmental regulation of your industry

Not having written agreements

First, oral agreements are difficult to enforce, and sometimes not enforceable at all. More importantly, memories fade over time, people change their stories over time, and people "remember" the agreement differently. Putting it in writing avoids these problems.

Starting as a partnership instead of a limited liability entity

Partners are jointly liable for all debts and obligations in general partnerships, as are sole proprietors for their businesses. If you start the business as one of those two kind of entities, and the business encounters a legal problem, your personal assets will be at risk. If, instead of a sole proprietorship or partnership, you start the business as a corporation, LLC, or limited partnership, you avoid that possibility, and thereby greatly reduce your risk

Getting involved in litigation

Litigation fees can actually bankrupt you. Beware the lawsuit!

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