Business gurus often advise entrepreneurs that they should not be afraid to make mistakes. But, when it comes to the legal aspects of your business, not being afraid of making mistakes can lead to disastrous consequences. What are the common legal mistakes business owners make? Here are my top five.
- Delaying seeking legal advice. Knowing the legal pitfalls is key to avoiding them. When starting a business, many entrepreneurs put off retaining competent legal counsel either because they are too busy or because they think a lawyer will cost too much. The cost of prevention is much less than the cost of correction. Clients have paid thousands of dollars to fix mistakes that could have been avoided if they had spent a few hundred dollars in legal fees earlier. And in some cases, the mistakes can’t be fixed.
- Improper company formation and maintenance. Having the appropriate legal structure is important for both personal liability and tax liability. Proper formation also includes documenting the owners’ rights. Nothing dooms a business faster than an unresolved misunderstanding among the owners that could have been avoided by a written agreement made before the dispute arose. Once the appropriate structure is in place, a business must comply with the formalities of maintaining that structure, such as keeping corporate meeting minutes and other records. Failure to properly maintain the business structure could result in the loss of liability protection.
- Not protecting intellectual property. Intellectual property includes patents, copyrights, trademarks, trade secrets, and other confidential or proprietary information. Many businesses fail to put adequate procedures in place to protect their inventions, works, and brands and to restrict disclosure of confidential information. Without such procedures and the use of appropriate agreements, a business may lose its valuable intellectual property assets.
- Not having contractor agreements. A business often needs workers, but either it is not ready to hire employees, as is typically the case with a new business, or the task is better handled by an outside contractor for work such as Web site development. Many businesses make the mistake of not having a written agreement with the outside contractor that specifies the scope of the project, ownership of work product and related intellectual property, noncompetition, nonsolicitation of customers, nonsolicitation of employees, and independent contractor status. A business is often surprised to learn that it does not own the rights to the work product it just paid to have developed because there is nothing in writing to secure those rights or the written document is inadequate.
- Not having employment agreements. A mistake closely related to mistake #4 is not having a written employment agreement with each employee. Many businesses assume that, since the employee is an employee-at-will, there is no need for a written agreement. If noncompetition, nonsolicitation of customers and employees, and ownership and protection of intellectual property are important to the business, it needs written employment agreements.
Making legal mistakes costs businesses money, lots of money, and sometimes results in failure. Don’t let legal mistakes ruin your business.
This article appeared in the Summer 2010 issue of Fine Print, a publication of the Ohio State Bar Association.