These 5 Common Legal Mistakes Can Hurt Your Small Business

When you’re running a small business, there are a thousand different things taking up your time: managing employees, introducing or perfecting products or services, updating your website, and much, much more. Legal responsibilities often get pushed down on the list of priorities, but it can be risky for a small business to put off these obligations.

Not making the right choices when it comes to legal concerns involved in running a business can hurt you and your company. See what legal mistakes many small businesses make and how you can make sure your company is on the right legal track.

Not Establishing the Right Legal Structure

Business legal structure affects things like how much a small business will pay in taxes, how much paperwork it will have to complete, and how much liability it faces in the event of a lawsuit. There are four common legal structures: sole proprietorship, partnership, corporation, and limited liability company (LLC).

Each type of business structure has certain advantages and drawbacks. It’s important to weigh the features of each legal structure and determine how these features may affect your small business according to BusinessInsuranceQuotes.

For example, if your business is likely to incur potential liability, a sole proprietorship or partnership–legal structures in which the owners are personally liable for the company’s financial obligations–may not be a great option for your business. In the event of a lawsuit, you could face huge liabilities resulting in significant financial losses without the right legal structure behind your business.

You can find specific information about choosing a legal structure for your business by visiting the Secretary of State website for your state or seeking out personal advice from an attorney.

Not Obtaining a Patent, Trademark, or Copyright

To avoid the possibility of your small business’s product, service, or other item of value becoming public domain, you must patent, trademark, or copyright that item or concept. Without a patent, trademark, or copyright, another business could use and profit from your name, logo, or work without facing legal allegations.

Your small business must legally protect what it rightly owns to avoid potentially having your entire idea or business stolen. Here’s how to protect yourself:

  • Patents. File a patent application with the U.S. Patent and Trademark Office after doing a thorough patent search and seeing that your invention or idea qualifies for a patent.
  • Trademarks. Register your trademark on the U.S. Patent and Trademark Office after checking the Trademark Electronic Search Database to ensure your mark has not already been registered.
  • Copyrights. Simply create your work. Once your piece of work (such as a book, movie, software program, painting, or architecture drawing) is “fixed in a tangible form,” or produced, written, drawn, etc., it is protected by U.S. copyright laws.

Not Having a Shareholders’ Agreement

If your company has more than one shareholder, you should have a shareholders’ agreement. Although it is not a legal requirement for companies, a shareholders’ agreement serves as a set of rules for how the shareholders of your business will interact with each other, helping settle any disagreements that may arise.

Shareholders’ agreements are typically comprised of multiple sections, which serve the purposes of identifying the parties of the agreement, the goals to be met by the agreement, what shareholders are to do in certain circumstances, and so forth. To draft an agreement, seek the advice of an attorney.

Not Selecting Outside Investors Carefully

Seeking outside investors can be risky for your small business. If you are in need of financial assistance, using outside investors may seem like a good idea at the time, but it could result in legal complications later on. In the event that your outside investors disagree with the way the business is being run, they could threaten legal action. If you’re considering using outside investors, be sure to select them very carefully.

Not Properly Handling Federal Payroll Taxes

Small businesses are required to make federal payroll tax payments to the government, making sure that all income and federal and state taxes are properly reported and paid. Failure to retain payroll tax records, misclassification of employees, and failure to provide W-2 forms to employees could result in severe penalties for your company. Also, if your business does not remit payroll taxes properly, you could be personally liable, resulting in a criminal investigation of your business by the IRS.

To avoid such complications, consider using a payroll service or hiring an experienced human resources manager or payroll manager to handle these responsibilities.

Where Small Businesses Can Seek Legal Advice

When dealing with legal matters for your small business, you can always seek out professional advice from an attorney who specializes in small businesses. Forums for asking legal questions and advice are also a great resource for small business owners. You can find a wealth of valuable information on free legal advice sites such as

Although the success of your business may depend on a list of endless tasks, be sure addressing legal responsibilities is a priority to keep your company protected and running smoothly.