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5 Legal Mistakes Every Self-Employed Entrepreneur Should Avoid
As a self-employed entrepreneur, you feel as though the weight of the world is on your shoulders. You wear all the hats: business owner, boss, human resources, marketing and product development.
The slightest legal misstep has the potential to set your small business back. Tread carefully and you’ll operate within the confines of the law.
These are the top legal mistakes to dodge when starting a business.
Entrepreneur Legal Mistake #1:
Overlooking the Importance of Compliance
It is no secret that we live in a litigious society. There are too many laws to keep track of. One mistake has the potential to spur a lawsuit, government fine or other penalty.
Though it is impossible to know the details of every single law and rule, you should be aware of the generalities of compliance. Reach out to an employment and business law specialist for guidance and you’ll move forward in confidence.
As an example, there are countless compliance rules and laws governing the maintenance of accurate records, labor, workplace safety and more.
Implement the necessary procedures and policies and you’ll sidestep legal hurdles down the line.
Tax compliance is particularly important when growing a business. From income taxes to filing tax returns, collecting sales tax and remitting that tax, there is plenty to keep track of.
Remain up to date with the details of local, state and tax regulations and you’ll keep your new small business safely within the margins of the law. NASE, your business law attorney and tax attorney are here to help.
Fail to pay your taxes and you’ll be faced with onerous legal challenges with tax authorities that have the potential to lead to criminal charges. When in doubt, lean on a tax advisor or accountant to guarantee full tax compliance.
Compliance with the law also helps boost your company’s reputation and standing in the community. Such reverence makes it easier to attract “rainmaker” employees who make a difference on the bottom line.
Entrepreneur Legal Mistake #2:
Ignoring Intellectual Property Laws
Intellectual property, commonly referred to as IP, is the lifeblood of many businesses. Ignoring intellectual property laws and rights will inevitably lead to a perilous outcome.
IP laws and rights are important for safeguarding your micro business ideas. Such protections are also in place to ensure you don’t infringe on the patents, copyrights and trademarks of others.
The same is true for your small business. Secure legal protection for your creative works, brand identity and inventions ASAP and you’ll protect your hard work.
An intellectual property lawyer will also help you avoid the illegal use of ideas, images, slogans and other IP protected by others. The last thing you want is an IP lawsuit after infringing on others. Such a legal battle can lead to egregiously punitive financial payouts that bankrupt your family business.
Above all, protecting your IP with a trademark, patent or copyright protects your inventions and creative expression.
Why subject your innovative ideas to infringement and theft when you an obtain a legal shield using intellectual property protection?
In the end, spending the time and money necessary to obtain IP protection safeguards your company’s market position and competitive advantage.
Entrepreneur Legal Mistake #3:
Choosing the Wrong Business Structure
Take your time when selecting your business’s legal structure. There are unique advantages and disadvantages to each structure. Those advantages and disadvantages range from tax treatment to liability protection, flexibility and more.
As an example, many entrepreneurs choose to begin their enterprise with an LLC, short for limited liability company. The primary advantage of structuring your enterprise as an LLC is that it provides your company with extensive legal protection.
This way, if your company is sued, its assets instead of your personal assets will be at risk. There’s no sense putting your home, bank accounts and other assets on the line when your micro business can bear the entire brunt of legal liability.
Aside from LLCs, there are other structuring options such as corporations, including both S and C corporation varieties. Sole proprietorship and business partnership options are also available.
If you aren’t completely certain as to which business structure is ideal for your new company, don’t guess. Consult with a business law attorney for invaluable guidance. Your attorney will help you identify the optimal structure for your company.
Entrepreneur Legal Mistake #4:
Neglecting Contracts
Contracts are the legal foundations of business relationships. The subtle details of contracts shape ensuing transactions, lawsuits and more. Though tempting, downloading a generic contract template from the web is a mistake.
A poorly-written contract or a generic contract template printed from the internet will inevitably lead to a negative outcome. Every single word matters.
The details of contract terms and agreements must be spelled out to protect your company’s financial interest. Each party’s obligations and rights should be clearly explained within the contract.
Moreover, details such as termination provisions, resolution mechanisms and breach of contract subtleties must be included.
Writing your own contracts is a mistake. Let your business law attorney craft carefully worded contracts on your behalf and you’ll move forward with new relationships in full confidence.
NASE, short for the National Association for the Self-employed is another invaluable resource for entrepreneurs. The NASE monthly newsletter provides helpful tidbits pertaining to small business contracts, business law and more.
Never sign a contract until it has fair or favorable wording. Too many entrepreneurs leap at the chance to ink a new deal with a dream client or partner without reading the small print. Let your contract law attorney read through the wording of the contract before signing your name.
If the other party pressures you to accept a handshake agreement, don’t give in. Such informal agreements have no legal protection. Handshake agreements cannot be enforced in court, ultimately rendering them meaningless.
The bottom line is you need a comprehensive contract with all clients, partners and other
parties before conducting business. Once this
legal safeguard is in place, you’ll move forward
without reservation.
Entrepreneur Legal Mistake #5:
Comingling Finances
Combining your small business finances with your personal finances is convenient. However, this streamlined and simple approach will inevitably backfire.
Comingling funds creates unnecessary complexities. Every business owner should have distinct accounts that separate his or her personal funds from those of the business.
Open and maintain a completely separate bank account for your business and you won’t have to worry about overlap and confusion with personal funds. Moreover, if you start a second family business, don’t commingle funds between your companies.
Keep in mind, you and your business are completely different in the eyes of the law. Comingling funds creates unnecessary accounting, tax and legal complexities that can be easily avoided with distinct accounts.
Commingling of credit cards and other lines of credit is also a mistake. Maintain separate lines of credit for yourself and your business with an awareness that each’s respective assets will be vulnerable in the event of default.
If you are still tempted to use one single consolidated bank account and/or line of credit for your business and your personal finances, think twice. Blurring the lines between your business and personal finances makes bookkeeping, accounting and tax obligations a nightmare.
Invest the little bit of time necessary to open a distinct bank account and business credit card. Use your business credit card for all business-relevant purchases and file your statements to minimize your company’s tax deductions at tax time. You’ll rack up the credit card rewards as an added bonus.
You Have Allies in Your Business Law Attorney and NASE
It is often said that pupils are only as good as their teachers. Chances are you don’t have a law degree. Your specialty is business, innovation, marketing and competing.
Recognize your limits and tap into the expertise of a business law attorney to guide you on your entrepreneurial journey. Your attorney will keep you within the confines of the law, ensuring full compliance while also shielding you from legal liability.
Be proactive, ask for legal guidance and your business law attorney will help maximize your bottom line without breaking the law. NASE members have as access to our Expert Portal, which includes a legal expert.