Top 10 Legal Mistakes Made by Small Businesses

Top 10 Legal Mistakes Made by Small Businesses

“If you really look closely, most overnight successes took a long time.”
— Steve Jobs

#1 Mistake

No Incorporation

Too many entrepreneurs and small businesses fail to establish a legal entity. At some point, this hurts them because they want to get outside investors, founders leave and/or they get sued by a customer or employee.

Not forming an entity in which to conduct business can open them up for personal liability.

What to do

Form a legal entity.   Determine if the best legal structure is an LLC, LP, C or S corporation. Hire an attorney to determine the best legal structure and form the legal entity.

For more information: A List of Legal Documents Must Haves

“The only limit to our realization of tomorrow will be our doubts of today.”

— Franklin D. Roosevelt

#2 Mistake

No Shareholders’ Agreement

When it comes time to sell the company or a founder leaves, or becomes incapacitated or dies, etc., a shareholder’s agreement guides everyone’s actions. Chaos will ensue without such an agreement.

What to do

Have an attorney draft a legal document that states how issues will be decided between shareholders and what happens if one leaves, dies, becomes incapacitated, or gets divorced, etc.

Form more information: A List of Legal Documents Must Haves

“Don’t let the fear of losing be greater than the excitement of winning.”
— Robert Kiyosaki

#3 Mistake

Personally guarantee company debt

New business owners get in trouble when they personally guarantee their company’s debt. Small business failures cause financial hardship or bankruptcy for the individual owners.

What to do

Don’t personally guarantee company debt or contractual obligations of the company. Do not put your house up as collateral. Guarantee company debt with company assets.

For more information: How to avoid personal liability.

“Keep on going, and the chances are that you will stumble on something, perhaps when you are least expecting it. I never heard of anyone ever stumbling on something sitting down.”
— Charles F. Kettering

#4 Mistake

Talk trash about their competition

The temptation for small businesses to talk trash about their competitors publicly or anonymously on the web is growing. Be careful not to libel them.

What to do

Seek the advice of an attorney for what is libel and what is freedom of speech.

“I failed my way to success.”
— Thomas Edison

#5 Mistake

Not getting a patent, copyright or trademark

Many small businesses fail to take the necessary steps to protect their intellectual property until another company steps in to take it.

What to do

Seek the advice of an IP attorney to do an inventory of the company’s intellectual property and seek to protect IP and trade secrets.

Form more information: A List of Legal Documents Must Haves

“The secret of success is to do the common thing uncommonly well.”
— John D. Rockefeller Jr.

#6 Mistake

Filing too many lawsuits

People get angry and sue each other. This ends up costing both sides a lot of money, time, effort and takes the decision out of their hands.

What to do

Litigation should be a last resort.  A better solution is always to negotiate rather than litigate. Any good attorney will say the same thing.

“Don’t be distracted by criticism. Remember–the only taste of success some people get is to take a bite out of you.”
— Zig Ziglar

#7 Mistake

Not protecting customer data on their website

Small businesses are at greater risk for getting hacked. The problem is not just the website going down, but the possible loss of sensitive customer data.

What to do

Explore services like SiteLock to secure the site and the data before it happens.

“Success is not the key to happiness. Happiness is the key to success. If you love what you are doing, you will be successful.”
— Albert Schweitzer

#8 Mistake

No written agreements

Many small businesses operate on a hand-shake, an oral agreement. If there is no writing, if and when one party fails to deliver under the agreement, you are left with a he- said she-said battle.

What to do

Get it in writing.  Enter into a written contract for all business deals.   Have an attorney draft the agreement.

“If you really want to do something, you’ll find a way. If you don’t, you’ll find an excuse.”
— Jim Rohn

#9 Mistake

Outside investors

Many small business owners bring in outside investors since they are desperate for cash. They then run into disagreements on how the company is to be run and the investors threaten legal action.

What to do

Best to grow a business, if possible, from the inside out (without outside money). The identity of the investor is as important as how much money they bring to the company. Choose very carefully.

For more information: How to protect yourself from losing control of your company.

For more information: Does it really take money to make money?

“Success seems to be connected with action. Successful people keep moving. They make mistakes, but they don’t quit.”
— Conrad Hilton

#10 Mistake

Not remitting payroll/sales tax to government

Small businesses must legally collect payroll and sales taxes. Not remitting these monies to government agencies will get the small business shut down and result in fines, penalties, etc.

What to do

Use a payroll service to remit employer and employee taxes automatically. Set up a separate account for the collection of sales and use taxes.

“Success is walking from failure to failure with no loss of enthusiasm.”
— Winston Churchill is published by Virginia K. Sourlis, an attorney licensed in the state of New Jersey. This site does not provide legal advice and it does not create an attorney-client relationship with anyone. This should not be considered legal advice. You should seek an attorney for your own situation. This website is for informational purposes only. Any and all views and opinions expressed on this site are solely those of the author and do not reflect the views of Virginia’s law firm. is not associated with any organization, group or institution, unless otherwise specifically noted.

I have not received any compensation for writing this post. I have no material connection to the brands, products, or services that I have mentioned. I am disclosing this in accordance with the Federal Trade Commission’s 16 CFR, Part 255: “Guides Concerning the Use of Endorsements and Testimonials in Advertising.”

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