Top Legal Mistakes Entrepreneurs Make

Top Legal Mistakes Entrepreneurs Make

1. Choosing the Wrong Business Entity

So you've decided to start your own business, congratulations! What's the next step, though? Before you get too far along, you should select the right business entity and ensure that it is properly set up. There are various business entities to choose from --- sole proprietorship, limited liability company (LLC), corporation, partnership. With each entity there are advantages and disadvantages, and it is important you choose the entity that is right for your business. Setting up your business improperly, or selecting the wrong entity can expose you to personal liability, and cause you unnecessary headache.

2. Not Having a Team of Advisors

Most successful entrepreneurs will attest to the importance of having a team of advisors. At a minimum, your team should consist of a bookkeeper and/or a CPA, a banker, and a lawyer. More specifically, you should hire a CPA who is familiar with your industry. The same applies for your lawyer. It's best to find a lawyer who primarily works with entrepreneurs and understands the entrepreneurial mindset. Having these professionals on board will help you to minimize risks and avoid pitfalls that could be detrimental to your success as an entrepreneur. 

3. Commingling Funds

Don't get into the habit of mixing personal finances with business finances. Keep your personal and business bank accounts separate. This is important because commingled funds could allow creditors or plaintiffs in lawsuits access to your personal assets, which is called "piercing the corporate veil". If this happens, you lose your liability protections , and you become personally liable for any debt or judgment that arises from a lawsuit or liability of your company. 

4. Not Protecting Intellectual Property

In today's digitalized world, it is becoming increasingly important for entrepreneurs to protect their intellectual property. Intellectual property can be defined as creations of the mind. IP is commonly divided into four categories-- trademark, copyright, patent, and trade secret. As entrepreneurs, you have intellectual property that is worth protecting, such as your logo, business name, slogan, website, presentations, books, etc. Protecting your intellectual property is essential to maintaining a successful business and protecting against the infringement. Even as a startup or small business, you need to protect your creative works. 

5. Improperly Classifying Employees as Independent Contractors

Misclassifying team members as independent contractors instead of employees is a common mistake. Misclassifying the employment status of your team members can affect tax implications, workers compensation, unemployment insurance, and other liabilities. As a result, you could face legal and financial ramifications. Although there is no single determining factor that distinguishes employees from independent contractors, the level of control you have is where you should start your analysis. For instance, does the individual work under your control or direction, do you provide training, do you set work hours, these are factors you should consider when determining whether a team member is an independent contractor or employee. 

6. Not Having Contracts in Place

Contracts are intimidating to some people, but a well-drafted contract is an entrepreneur's best friend. Contracts are important because they clearly lay out the expectations of the parties, and helps to eliminate doubt and uncertainty. As entrepreneurs, it is important to document agreements that involve clients and people or businesses that you work with. A few of the essential contracts every entrepreneur should have include: an operating agreement, client services agreement, website privacy policy, independent contractor agreement, and a copyright assignment agreement, just to name a few. In sum, having an enforceable contract is an effective way of protecting your business and yourself. 

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