Hindsight is 20/20. But the last thing you want is to see where you went wrong in your business after it failed, especially if the mistakes could have been prevented. Sometimes, a legal oversight leads to a business's demise – something you forgot to do or didn't do correctly.
Here are six legal mistakes to be aware of that can sink your small business.
1. Failing to get the correct licenses and permits
Governments put business regulations in place for a reason. It helps maintain industry standards and keep the public safe. Imagine if there were no restaurant licenses? With no food and safety inspections, restaurants may let kitchen hygiene slide or sell contaminated food.
Operating a business without the relevant licenses can result in fines, penalties, suspension, or even the closure of your business. The onus is on you to find out what business permits and licenses are required in your state and local municipality.
2. Choosing the wrong business entity
Deciding on a business entity can be tricky if your business is still new. Solopreneurs often opt for the simplest structure, i.e. sole proprietorship.
As a sole proprietor, you may not need to register the business with the state. As such, there is no legal separation between you and the business. You will, therefore, be held personally liable for any lawsuits or financial obligations that arise.
Registering as a limited liability company (LLC) instead will remove any personal liability. If you have one or more business partners, it may be best to register as a corporation (Inc.). Each type of business structure has a legal implication. Here's an LLC vs Inc. comparison to help you decide.
3. Not securing trademarks, patents, or intellectual property
Theft of intellectual property costs businesses billions of dollars each year. Some businesses have no case against perpetrators because they did not legally protect their intellectual property (IP).
What is covered under intellectual property? IP refers to any creative, literary and artistic works, photography, designs and inventions. It includes business trademarks, copyright, patents, industrial designs, and trade secrets.
It can be something as minor as plagiarizing a blog article or something that directly threatens your business's income, like counterfeit copies of your product.
4. Not protecting your online content
Stealing images, logos, slogans, designs, and written content from your company website is easy. All someone has to do is right-click on an image or selected text and copy it. Once they have it, they can reuse it in a way that could reflect poorly on your brand.
To deter people from stealing your content, place restrictions on copying images and text on your website. There are a few ways to do this:
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Make it clear on your website that content is subject to copyright laws. For example, if you register your images with Copyrighted.com or DMCA, you can add their protection badge to your website and images.
5. Not complying with labor laws
Poor labor practices can land you in hot water with the law. It can also lead to worker strikes and high employee turnover rates. Plus, the bad publicity from employee disputes can damage your company image.
To avoid this, make sure you comply with federal and state labor laws. These include:
6. Poorly drafted contracts
Never try to draft contracts with partners, suppliers, employees, and other stakeholders yourself. Contracts are legally binding, and if you omit vital information, it can have serious consequences.
A standardized or poorly drafted contract may result in deliverables not being completed correctly or on time. It can also put your business at risk for financial losses and lawsuits.
Have an attorney specializing in business law draw up contracts or review ones you have drafted. You need to be sure a contract is watertight before signing on the dotted line.
7. Weak cyber security
Just one cyber-attack can kill your small businesses. The statistics show that nearly half (43%) of cyber-attacks are directed at small to medium enterprises (SMEs), and up to 60% of these businesses will fold within six months of a cyber-attack.
One of the reasons so many small businesses don’t survive a cyber-attack is because they didn’t beef up their cyber security. Forewarned is forearmed. Businesses at risk should consider hiring a team member within the cyber security space or, at the very least, outsourcing to a cyber security firm that can assess security protocols and recommend additional measures to strengthen your online security.
You've worked hard to build your business. Don't let a legal oversight put it in jeopardy. Instead, consult with a business lawyer who can help you meet all compliance regulations and set the right policies to protect your business.