During the startup phase of a new business, the temptation is for the new business owner to focus almost exclusively on generating revenue and reducing expenses, so that they can make the business profitable as quickly as possible. Indeed, it is wise for a company to keep an eye on the bottom line, and the importance of sales for a small business cannot be understated. However, small companies often get into trouble because they are so focused on sales in the early years that they don’t think about putting the right legal protections in place, and important legal matters go unnoticed and unaddressed. Reminiscent of the fable of the “Emperor’s New Clothes,” these business leaders operate companies that may appear successful on the surface, but actually remain exposed and blinded to the catastrophic legal risk, claim, or liability that could force that emerging company out of business in the blink of an eye.
Although every business has its own unique set of challenges, the 3 most common legal mistakes made by new business owners are as follows:
- Not forming a separate company.
People who go into business selling goods or services without forming a separate company are at risk of being personally liable for any business debts and claims or judgments against the business. That means that they could lose their personal assets – their cash in the bank, their car, their home, etc. – if the business is hit with a large judgment that it cannot pay. Incorporating the business or registering it as a limited liability company (LLC) creates a barrier between the business owner and the liabilities of the business, and helps keep the owner’s personal assets safe.
- Investing in branding without considering IP rights.
Eager new business owners sometimes invest significant amounts of money coming up with clever business names, designing logos, developing websites, and creating other marketing materials, only to find out later that their expensive branding violates another company’s trademark. Before going to market or investing in the development of a brand, the business owner should confirm that his or her ideas will not infringe the IP of another. They should also consider seeking their own IP protection to ensure that no one else copies their brand in the future.
- No contracts or using “boilerplate” contracts.
Ever have a disagreement with someone where both of you are convinced you are right, and can’t understand why the other person doesn’t see it your way? Memories can fade, and perspectives can differ. In a business setting, those disagreements can have significant financial consequences. Effective written contracts help make sure that both parties understand what is expected from each other to avoid disputes down the road, and establish ways to resolve disputes in the event they do occur. However, not all contracts are created equal, and it is important that any business contract you use be specific for your particular situation, industry, and jurisdiction.