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Five Common Legal Pitfalls of Small Businesses

For new small businesses, cash is king and keeping overhead low is an entrepreneur’s cardinal rule. As a result, small business owners often forego the advice and assistance of lawyers. Many small businesses falter due to early and avoidable missteps associated with not seeking legal advice early. A good lawyer can add value, provide insight, and pave the way for your business to flourish without requiring a second mortgage. Not doing so can be disastrous. Here are the five most common—and most deadly—legal mistakes small business owners make when they do not have the benefit of legal counsel:

1. Choosing the wrong form of business. If you’re a one-person business, you may think you don’t need the additional complications of forming a corporation or LLC. For even the smallest business, however, incorporating or forming an LLC protects your personal assets against creditors, so the cost and time can be worthwhile. The form of business you choose will also affect how easy it is to raise capital, which entities you can solicit investments from, and more. It is important to not only consult a lawyer, but also take your long-term goals into account before making this decision.

2. Not putting a partnership agreement in writing. If you start a business with a friend, spouse or co-worker, you may think there’s no need for a written agreement. But there is a reason for the age-old warning against “mixing business with pleasure.” No matter how close you are now, you never know when a partnership can go bad, and putting the terms of your partnership in writing will help protect you in the event of a falling-out and make it easier to value and sell your company should you decide to exit. Your partnership agreement should cover the percentage of ownership each person has, what they contributed (money, assets, sweat equity) to obtain that percentage, each person’s title/role, how decisions will be made, and what happens if a founder wants to leave.

3. Failing to trademark your business name and logo. Before selecting your business name, search online, do a search with the U.S. Patent and Trademark Office, and check with your state’s business filing office (usually a part of the Secretary of State’s Office) to see if anyone else is using the names you have in mind. Once you choose a name and develop a logo, trademark them to protect yourself. Otherwise, you could pour hundreds of thousands of dollars into developing your brand, only to have someone else steal it from you (or claim you stole it from them).

4. Working with vendors or clients without a contract in place. In the excitement of starting a business or landing a big customer, it’s easy to get ahead of yourself and jump right into starting the project or manufacturing the goods on a handshake. Always protect yourself by using a contract. Develop a few standard contracts you can adjust to fit the situations your business is likely to encounter. A lawyer can help you create these contracts, then quickly review any that you have questions about signing; which will cut down on your costs compared to creating new contracts from scratch each time. When hiring freelancers or independent contractors, use a contract that ensures your company retains the rights to their work and clarifies their independent status.

5. Being too cheap to seek legal advice. My law partner often advises our clients with a warning his grandmother issued to him: Don’t be “penny-wise and pound-foolish.” Nowhere is this truer than when it comes to consulting a lawyer. Trying to save money upfront by doing it yourself can cost you much more in the long run. They key is to find an affordable lawyer that you trust who can understand your business. Don’t be afraid to ask your lawyer about ways to cut costs or utilize alternative fee structures such as paying per-service rather than per-hour.