Common (and Costly) Legal Mistakes Entrepreneurs Need to Avoid

Author: Stephanie Taylor Christensen | March 11, 2016

Your business may be small, but that doesn’t inherently shield you from legal risk. Here are some common—but potentially costly—legal mistakes all business owners should take precautions to avoid.

Legal Mistake #1: Assuming being incorporated protects you from liability

Incorporating your business can help protect your personal assets and manage your tax liability, but you’re not legally off the hook once you have a formal business entity. Confirm your business has adequate small business insurance coverage based on what you sell, where, and to whom.

Though a general business liability policy is designed to protect business owners from a variety of mishaps, including accidents at your place of business, issues with products you sell, and some contractual liability, you may need additional coverage. For example, if you or your employees drive vehicles that are primarily used to conduct business, personal auto policies may not apply—you may need a small business auto insurance policy. 

Legal Mistake #2: Crowdfunding before you understand the risk

Understand your legal obligations to potential investors before you start a crowdfunding campaign. “Any small business owner considering crowdfunding should be prepared to accurately answer investor questions. These may include company ownership, financials, the business plan, and additional details about business activity and specifics regarding the who, what, when, where, and how,” says Braden Perry, a financial services attorney with Kennyhertz Perry, LLC. If you’re not prepared to transparently and accurately address such questions, consult with a startup attorney to confirm you’re reporting information as legally required.

Legal Mistake #3: Publishing creative assets you don’t own

Publishing any material you don’t own the creative rights to—such as an image, infographic, or article—could violate copyright laws, and your business could be held legally accountable.

Secure legal permissions to publish articles or quotes from the owner of the asset (ideally, in writing) before you publish. Make sure any employees who post to your website or social media platforms do the same. Copyright infringement occurs when material is published without the owner’s permission, and you could be held liable for damages—even after you delete the item in question.

Legal Mistake #4: Not obtaining intellectual property rights for brand elements

Your business’ name, logo, likeness, and trade secrets all need to be legally protected—even when you’re just starting out. Take stock of all the brand elements that contribute to your business identity and any proprietary products and names, then secure the necessary intellectual property rights and trademark ownership for them.

Legal Mistake #5: Not having formal employee policies and procedures

As soon as you hire one employee, follow the same human resources protocol as a big corporation for your own legal protection.

Outline employee policies and procedures in a formal document

Secure all employees’ signed acknowledgement that they have read, understand, and agree to your business procedures on their first day of work. Remember to address policies regarding mobile devices, social media, and permitted use of business intelligence, including accessing a cloud-based desktop offsite.

Keep records of performance

You cannot legally fire an employee—even for poor performance—unless you have documented a record of performance issues and incidents leading up to the event. Your documentation should demonstrate how the employee was warned and coached in an effort to resolve the issue, along with their signature acknowledging the matter. Otherwise, you could find yourself battling a wrongful termination lawsuit.

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