The Top 8 Legal Pitfalls New Business Owners Fall Into
There are so many things to get right when you’re just starting a new business, and a number of things you’ll inevitably get wrong. Every new business owner ends up learning some things the hard way, but you can avoid a lot of potential trouble by listening and learning from other business owners’ mistakes. Here are a few common legal mistakes new entrepreneurs make that you should be sure to avoid.
Failing to get the right documentationIn the early days of a new business, you have limited funds and are looking for any opportunities to cut costs that you can. You may think you can get by with the cheap and easy corporate documents you can buy online, but according to Tina Willis, Orlando accident & injury lawyer, that’s a big mistake – especially if you’re starting a business with multiple shareholders.
Whenever there are multiple shareholders, it is absolutely essential that they hire a real corporate lawyer, if not during formation of the business, as soon as possible after incorporation.
“Whenever there are multiple shareholders, it is absolutely essential that they hire a real corporate lawyer, if not during formation of the business, as soon as possible after incorporation. Ideally, each shareholder would have their own corporate lawyer,” she explains.
Her own husband experienced the pitfalls of skipping this step in his first business. When he decided he wanted to sell his shares and move on, the lack of documentation left him with little power to do so. “This ultimately required us to hire a corporate litigation lawyer and spend a lot of time and money fighting a profoundly unfair situation.“
Her husband’s not alone in this experience. It’s often tempting early on when everything’s going well to assume that things will stay that way. Says Syed Irfan Ajmal of Ridester, “The hardest time to have a written agreement with your co-founder is when you guys are just starting. But that is also the most optimal time to do it.”
The first few months of a new business may feel like a honeymoon period where it’s easy to get caught up in the excitement and overlook asking the hard questions, but honeymoons end and you need things to stay stable when you start facing the nitty gritty of keeping a business going every day.
You can hire a lawyer early on to get everything in writing, or you can risk facing higher costs (both financial and emotional) later on if things become contentious.
Not getting the right permitsEvery city has its rules about where businesses can be located and how they can be run. To make sure you stay on the right side of the law when opening up your business – especially if it’s a business with a storefront – you have to do your research into permits.
Janell Woodbury of Exit Strategy Games learned this the hard way when she found a great location with cheap rent to open up her new escape room business. Turns out, that cheap rent ended up costing her big when she realized she had overlooked the need for proper permits.
My new business was shut down for 3 1/2 months while I paid incredibly high fees to ‘attempt’ to get the right building and rezoning permits.
“I assumed I'd have to simply pony up the money for the right permits to rectify the situation. I couldn't have been more wrong. My new business was shut down for 3 1/2 months while I paid incredibly high fees to ‘attempt’ to get the right building and rezoning permits,” she shares. And she considers herself lucky that she was eventually able to get the right permits at all. A lot of time and money could have been saved if she’d done her research upfront.
Not choosing your name carefully.You’ve probably already figured out that choosing the perfect name for your business is challenging. You want it to be meaningful to what you do, sound good, have an available domain name, and be easy to remember – all of which is hard enough. But there are legal issues you have to consider as well.
When Caton Hanson, Founder and Chief Legal Officer for Nav, first started the company, they went with the name Creditera because “the .com domain name was available and we thought the name helped convey the service we offered.” But not only did customers have a hard time remembering the name, but they had overlooked that another business in their space had a similar name.
“That firm sued us,” he says. They could have fought it, but it would have cost money and they weren’t entirely attached to the name anyways. They decided it was easier to pick a new one.
Skipping the liability insuranceThis is another warning of Tina’s. “many small business owners do not even think about the possibility of being sued by a personal injury lawyer (like myself), for something like a slip and fall on their property, negligent security, or other types of premises liability cases.”
A lawsuit over something that seems small to you could end up ruining your business if you’re not properly covered. And Keri Lindenmuth of the Kyle David Group goes one step further in her recommendation for ecommerce business owners, “If they're collecting data from customers, selling products on a website, etc., they need cyber liability insurance to keep them protected from any future lawsuits should a data breach or cyber attack occur and jeopardize their customers' data.”
Even if large businesses are bigger targets than you are, it doesn’t mean you’re safe from cybersecurity issues.
It seems like every week we hear about a new hack or data breach. Even if large businesses are bigger targets than you are, it doesn’t mean you’re safe from cybersecurity issues. You should do what you can to protect your customers’ data, of course, but it’s also worth it to get the proper insurance to protect your business as well.