Legal Lessons For Small Businesses
Becoming an entrepreneur can be like tiptoeing through a field littered with landmines. Some of the most explosive and most destructive landmines that you can step on are legal ones. Legal mistakes can not only ruin your business, but ruin your life. Here are the most common legal mistakes that entrepreneurs make and ways of avoiding them.
Legal Mistakes That Can Ruin Your Business Video
Legal Mistake: Equal Partnership
When you are beginning a new venture with a partner, most people will assume that it is a 50-50 split of decision-making power and profits. This seems like the fairest way to run a business. However, in practice this can be a recipe for frustration. What happens when you and your partner have a disagreement over a major issue in your business? Don’t think it won’t happen. In my experience, partnerships often end this way. There is a reason we have a President and a Vice-President rather than 50-50 Co-Presidents.
Legal Remedy: The Non-Democratic Partnership
If you are thinking about a partnership, consider making it a 51-49 split or making one partner silent. This will give one person (preferably you) the decision-making ability when there are important disagreements. No business should be a democracy; someone needs to be in charge, especially in the difficult early days.
Legal Mistake: Not Incorporating
Many entrepreneurs choose a sole proprietorship, limited liability company or S-Corp because it is easier. They cost less to set up—especially a sole proprietorship, which costs nothing. The problem is that these give you no protection whatsoever. Creditors or sue-happy disgruntled customers can come after not just your business, but you personally. You could end up millions in debt and homeless. This may seem like an extreme possibility, and it will certainly feel extreme if it happens to you.
Legal Remedy: Incorporation
Incorporation is almost always the right choice for business, whether they are large or small. First, it makes it easier to get funding because it shows that you are serious about your business and you have your ducks in a row. Second, it protects you personally if your business fails or is sued. Sure, you might lose the business in bankruptcy. However, you will be able to start over quickly and know where you are sleeping in the meantime. It may take a little more time and expense in the beginning, but piece of mind is priceless.
Legal Mistake: Verbal Agreements
Many entrepreneurs make verbal, ‘hand shake’ agreements with partners, vendors and clients. Then, when the deal does not work out, no one can seem to agree on what the original terms were. In some unfortunate cases, unscrupulous people will not hold up their end of the bargain simply because they know that it will be difficult to enforce.
Legal Remedy: Get It in Writing
Putting expectations in writing protects all sides of any agreement. These don’t have to be written in stone; they can be modified as necessary. If you do not regularly consult with a lawyer about business deals, you may want to start now. However, this can be expensive and out of the financial reach of many entrepreneurs. If you are in this situation, don’t let it hold you back from getting legally enforceable agreements. There are many legal templates and other forms on the internet that you can access. Sometimes legal documents are not even necessary; you merely need a written agreement that is signed by both parties. A quickly drawn-up contract is better than none at all.
Legal Mistake: Trusting the USPTO
If you are a responsible entrepreneur, you did your homework before filing for a trademark. You took a look through the U.S. Patent and Trademark Office database and poked around the internet for an afternoon. Convinced that no one in your area or line of business is using your name or logo design, you then filed for a trademark and began printing stationary.
Legal Remedy: Do Your Homework
It is good to begin with that database and the internet. However, because so much is at stake, you need to really be vigilant. Look in not just the national trademark databases, but in the state one as well. You should also look at domain registries, business directories, the Yellow Pages, and every other resource that you can think of. Then, file for that trademark and, if possible, hold off on investing in branded inventory until you are legally free and clear.
Legal Mistake: Friends with Benefits
As your business grows, you may be tempted to take on new partners who could add immensely to your business, either through cash investment or through their life experience in your field. You like them, they like you; who needs a contract? You probably intend to get a detailed agreement worked out and signed after other important stuff is accomplished, but it just keeps getting pushed off into the future. After all, you are all nice people. And then it all goes south.
Legal Remedy: A Detailed Agreement
When you first take on a partner, you go through a honeymoon period. You have not yet noticed that they have a really annoying laugh or that they could not balance a spreadsheet to save their lives. You both think only wonderful things about each other, which makes it much easier to have those hard conversations. In addition, your partner has not invested huge amounts of time or money in your business yet, so it is not too late to walk away if no agreement can be reached. You need to work out who owns what, who has what power and who will leave with which assets if the partnership does not work out. Consider it a prenup for your business. Don’t forget what we said about 50-50 partnerships!
As you can see, it is easy to avoid many of the most common legal landmines that confront entrepreneurs. All it takes is a little time and a lot of vigilance. There is no reason to leave yourself unprotected; make sure that your business has the legal foundation that it needs for success.
