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11 Way to Keep Your Startup on the Right Side of the Law

Common small business mistakes (and how to avoid them)

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W hile starting a business is thrilling, unanticipated legal challenges can complicate matters. Many founders are so focused on their excellent ideas that they neglect legal problems. This could be a formula for disaster. Adhering to the law from the start will provide a solid foundation that will keep your business safe. The following provides a list of eleven common small business mistakes, along with tips for avoiding them, to help you get through the sometimes tricky legal waters of launching your company.

1. Failing to Register a Business

Many small businesses operate informally to test the waters. However, this exposes you to personal liability and hinders your company’s growth. In other words, you might be held personally responsible for business debts and lawsuits if you don’t register your business and establish it as a legal entity that is separate from yourself. You’ll also miss benefits like tax breaks and loans available only to registered businesses. 

Tip: Register your business with the appropriate government agencies. Depending on your enterprise structure, industry, and location, this can be a federal, state, or local process. Research your specific requirements to ensure proper compliance.

2. Neglecting to Obtain Proper Business Insurance

Unexpected events like fires, floods, or lawsuits from faulty products can harm your business financially. Insurance offers financial protection in case of covered events, reducing these risks.

Tip: Secure business insurance tailored to your specific industry and needs. Common types of coverage include:

  • General liability insurance
  • Property insurance
  • Product liability insurance
  • Business interruption insurance

Working with an experienced insurance broker can help you assess your risks and choose the right coverage plan.

Many founders are so focused on their excellent ideas that they neglect legal problems.

3. Dismissing the Importance of Legal Advice for Small Businesses

Don’t risk expensive oversights with legal DIYs. Trying to save money by skipping a lawyer can be more costly in the long run. Legal complexities can lead to considerable financial losses, especially if you attempt to navigate contracts, disputes, or complex legal issues without proper guidance. Tip: Consult a qualified lawyer to legally protect your business. They can guide you through the intricacies of contracts, help you resolve disputes efficiently, and advise you on complex legal issues that could impact your business’s future.

4. Missing Business Licenses and Permits

Operating without the necessary permits can bring your operations to a standstill, leading to fines and potential legal ramifications. Every industry and location, such as healthcare workers or restaurant owners, may have specific licensing requirements. Failing to comply can result in hefty penalties, business closure, and legal trouble.

Tip: Identify and acquire all necessary licenses and permits to operate legally. Research your industry and local regulations to ensure compliance.

5. Overlooking Tax Obligations

Tax laws are complex, and non-compliance can result in penalties, interest charges, and audits. The federal government has tax requirements. Depending on your small business structure, you may be required to pay:

  • Income taxes
  • Excise taxes
  • Employment taxes

Most states have additional regulations that tax businesses, except Wyoming and South Dakota, which do not tax businesses.  

Tip: Stay updated on tax filing deadlines and regulations. Seeking tax advice for small business entities from a professional can help minimize your tax burden and ensure ongoing compliance.

6. Being Unaware of the Importance of a Business Plan

A business plan is more than just an investor pitch—it’s your legal roadmap. It outlines your business structure, market analysis, and financial projections, all crucial for legal compliance and strategic planning. A well-defined business plan can also help you secure funding.

Tip: Develop a comprehensive and dynamic business plan for obtaining licenses and permits. This demonstrates your commitment to legal compliance and risk management to potential investors.

7. Mixing Personal and Business Finances

Keeping separate accounts is essential for transparent financial tracking and legal protection. When you mix personal and business finances, tracking business expenses for tax deductions becomes difficult and can create a reporting nightmare. Additionally, if your business is sued, your personal assets could be at risk.

Tip: Maintain separate bank accounts for business and personal finances. Use business accounts for all business transactions and a dedicated credit card for business expenses.

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8. Overlooking the Need for Contracts

Contracts safeguard your business interests. Without them, misunderstandings and disputes with partners, clients, vendors, or employees can lead to costly legal battles. Contracts clearly outline the terms and conditions of a business agreement, ensuring everyone involved understands their rights and obligations.

Tip: Have clear, written agreements with partners, employees, and suppliers. Don’t rely on generic templates online. Well-drafted contracts outline terms and conditions, such as payment schedules and service expectations.

9. Disregarding Local Zoning Laws

Zoning laws and ordinances dictate where you may operate and what activities are permitted. Some areas are zoned for residential use, allowing for daycares, while others are zoned for commercial activities, such as waste management. Disregarding zoning ordinances can lead to penalties and legal issues and even force you to relocate your business.

Tip: Research the zoning laws in your area before starting your business to know which types of businesses are permitted in different zones. This ensures your company location and operations comply with local zoning ordinances. 

10. Neglecting Online Business Laws

The e-commerce boom requires adherence to online business laws, including privacy policies and data protection regulations, like the California Consumer Privacy Act (CCPA). These laws protect businesses and consumers by mandating the secure handling of personal information online. Non-compliance can result in hefty fines and reputational damage. Following these regulations builds trust with customers and avoids legal trouble.  

Tip: Stay informed about these evolving laws and update your practices to remain compliant and uphold customer trust.

11. Ignoring Intellectual Property Rights

Often, a startup’s most valuable asset is its intellectual property (IP). Protect your brand with a trademark, your content with a copyright, and your unique inventions with a patent to prevent unauthorized use. Failing to protect these aspects of your business allows others to exploit your hard work.  

Tip: Regularly monitor for infringements and violations of your IP rights and take immediate legal action to safeguard your business assets. Being aware of these common small business mistakes and proactively avoiding them can establish a path to success for your enterprise.

Disclaimer: Bizee and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.

Key Takeaways

11 common legal mistakes startups make: Failing to Register a Business; Failure to Obtain Proper Business Insurance; Dismissing the Importance of Legal Advice; Missing Business Licenses and Permits; Overlooking Tax Obligations; Being Unaware of the Importance of a Business Plan; Mixing Personal and Business Finances; Overlooking the Need for Contracts; Disregarding Local Zoning Laws; Neglecting Online Business Laws; and Ignoring Intellectual Property RIghts.

Shaneequa Parker

Shaneequa Parker, JD, MPA, MSW, CDP/CDE, has more than 15 years of experience working in the social service and nonprofit fields, as well as professional cosmetology experience. She serves as the Vice President of Compliance and Legal Affairs for a New York City-based nonprofit organization. Managing the organization's compliance and professional development activities feeds her passion for helping others grow professionally and creating nurturing networks and connections. Read more


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