If you’re like most small business owners, you love what you do… at least on most days. You love working with customers and seeing your business grow, but what about the legal side? If you didn’t go to law school, it’s hard to be blown away by the legal fine print.
I’ll share some of the common legal mistakes that small businesses make and ways to steer clear of them.
No matter how many tasks are on your plate or how fast business ramps up, your legal obligations should be taken seriously.
Before you officially launched your business, chances are you spent hours trying to find a business name that had a decent, available domain name. But, did you ever check if that business name was infringing on the rights of an existing business? If you haven’t, note that you’re not allowed to use a business name if in use by a company in a similar capacity.
What happens if you accidentally use another business’ name? You might receive a Cease and Desist letter from the other company that claims you’re infringing on their name. In the worst case, you may be ordered to stop using your company name right away and may even need to pay damages.
Despite this mishap, this situation is completely avoidable—it just takes a little due-diligence. Verify that your business name is available in two steps. First, check if your proposed name is already being used by someone in your state. You can perform a free online search that scans the business names registered with your state’s secretary of state office. (You can find these searches either on the secretary of state’s website or an online legal filing service, and both are free.)
If that search comes out clean, you can check to see if the name has been registered with the U.S. Patent and Trademark Office (USPTO). You can perform this search on the USPTO website or an online legal filing service (and again, both are free).
For clarity: It’s absolutely okay to operate a business without an official business structure. If you never register a business structure with the state, then you’re operating as a sole proprietor (one owner) or general partnership (multiple owners). And this is totally legal. However, the downside is that there’s no separation between you and the business when you’re a sole proprietorship or partnership. This means that anything crisis that happens in the business can impact you personally—so if your business is hit with a lawsuit or can’t pay its bills or debts, you’ll be personally on the hook.
You can easily solve for this by forming an LLC (Limited Liability Company) or corporation. These business structures separate the business owner from the business and thus, help minimize your personal liability. If you’re a small business and want to keep things as simple as possible, then the LLC can be a better option than the corporation. The good news about business structures is that you can form one at any time. Even if you have been running your business for years, it’s not too late to ramp up your liability protection by forming an LLC or corporation.
Riffing off of mistake #2, in some cases, you might have formed a business legal structure only to discover it’s not optimal for your business. One common issue is a small business owner forms a corporation, then becomes overwhelmed with all the administrative overhead (such as holding an annual shareholder’s meeting or keeping meeting minutes). As a solution, you can choose to close the corporation and form an LLC instead.
Perhaps you formed a corporation and then realized it’s causing your profits to be taxed twice (once when the company is taxed on the profit and then twice when you take those profits out as a dividend). In this case, you might want to elect S Corporation tax treatment with the IRS. Pro-tip: Before you make the switch, it’s wise to talk to a tax advisor first. But the lesson here is that it’s never too late to change your company’s legal structure if you don’t think it’s working for you.
Every business likely needs to apply for some kind of business license or permit with local government (although the specific requirements depend on your business type and location). For instance, a caterer will have different permit requirements than a graphic designer. Typical licenses include general business license, zoning permit, sales tax license, health department permit, fire permit, and professional licenses. You can find out what permits you need by contacting your local government or an online legal filing service. Failing to get the right permits can result in some hefty fines. And, in the worst case scenario, the local government could shut your business down.
Another common mistake is when small business owners form a corporation or LLC, but fail to maintain it properly. An LLC or corporation needs to keep up with a number of administrative obligations throughout the year. If you fail to do so, the state could put your business in bad standing. That means you can’t get a business loan and you lose your personal liability protection (among other things). Here are some of the things you need to do to keep your business in good standing:
At the end of the day, here’s my advice to any small business owner: No matter how many tasks are on your plate or how fast business ramps up, your legal obligations should be taken seriously. If you’re already guilty of one of these common mistakes – don’t worry! It’s never too late to address it, fix it and move forward with a little more peace of mind.