Starting a business can be fraught with potential legal issues that are often overlooked by first-time entrepreneurs. Many details that don’t seem pressing at the start can mean the difference between success and failure later on. Overlooking or discounting important details can cost an owner time, money, and headaches. Many common pitfalls can be avoided with the right planning and execution. Here are five mistakes business owners make…and how to avoid them.
Mistake No. 1: Making handshake deals with clients and vendors
Always put business dealings in writing. Don't naively assume that everything will go according to plan. This is often not the case, and when things do go wrong, the entrepreneur and the client or vendor may have different ideas about what is supposed to happen.
How to avoid it: Keep evidence of a written agreement containing essential terms and conditions for every relationship the company enters into. This will help protect the owner and the company from loss of time, money, and potential lawsuits.
Mistake No. 2: Choosing the wrong business structure
Whether an owner chooses sole proprietorship, S-Corp, or limited liability company (LLC), making a hasty choice can put the company at risk, as well as lead to painful tax bills at the end of the year. With a sole proprietorship a business is not required to register with the state and it's often chosen by startups operating on a shoestring. But beware that there's no wall between the business and the owner’s personal assets.
How to avoid it: S-Corps and LLCs may cost more to set up and maintain, but the company is kept legally separate from personal assets so it's less risky if the company goes under or is the target of a lawsuit. Incorporation is recommended in most cases. Since it's a more complex structure, it shows customers, banks, and investors that you're serious about being in business over the long haul. If you opt for the simpler route of sole proprietor, it’s suggested to look at business insurance to protect your personal assets in case your company is sued and loses. Of course, you'll want to consult with a lawyer or accountant to determine the best structure for your particular size and needs.