Opening a business can be one of the most exciting undertakings of your life, but it can also be one of the scariest. There are many aspects of a business that need to be considered and individuals often put off some of the important legal issues that should be addressed. We’ve compiled a list of the five most common legal mistakes people make when forming businesses to help people avoid trouble down the road.
1. Not Choosing the Correct Entity Type: The most common types of business entities are sole proprietorships, corporations, limited liability companies (LLCs), limited partnerships, and general partnerships. Some types of businesses or professions have restrictions on the types of entity available. Each entity type has its own advantages and disadvantages; for example, some business structures (such as sole proprietorship) do not offer the personal asset protection of other types (such as a corporation). We strongly encourage all new business owners to become familiar with each type of entity before deciding what business structure is right for their venture. It can be difficult to change the business structure at a later date, so setting it up correctly from the beginning is imperative. Further, once the type of entity is chosen, it is critical to follow all necessary formalities for that entity type.
2. Failing to Document Business Partners Rights & Responsibilities: No matter how well you get along with your business partners, who may even be family or longtime friends, it is important to have a written agreement that addresses each party’s contribution (both financial and efforts), what each partner owns, and what will happen in the event of a buyout or fallout between the partners. Another common mistake that can lead to problems is creating a 50-50 partnership because this can lead to deadlocked decisions and put the company into limbo when action is needed. A 51-49 split usually ensures that executive decisions can always be made in a timely manner.
3. Failure to Get a Business License. Most businesses, no matter how big or small, are required to have some type of business license whether local, city, state and/or federal. Generally business licenses are relatively inexpensive but the fines if it is discovered that your business is operating with the correct license(s) can be quite costly.
4. Failure to Prepare Necessary Contracts. Written agreements should be prepared any time that you deal with an employee or independent contractor, and with most company vendors or suppliers. For many businesses it is critical that employees or contractors keep certain business information confidential; a written nondisclosure agreement can help to protect such information. Basic terms and payment details should be in writing for any vendor or supplier used by your company.
5. Ignorance of Business Law. As the saying goes, ignorance of the law is no excuse. Every entrepreneur should know basic contract rules such as how to protect intellectual property through patent, trademark and copyright law, basic employer-employee law, and governmental regulation of his/her business type. Being familiar with these types of issues and how they will affect your business may prevent litigation which can destroy a small business.
If you are starting a California business and would like to talk to an attorney about any of the above, or if you need help forming a business entity, please contact Suzuki Wuori, LLP at 619-462-0995.
The materials appearing on this blog are provided for informational use only, and are in no way intended to constitute legal advice or the opinions of Suzuki Wuori, LLP or any of its attorneys. Transmission or receipt of any information from this website does not create an attorney-client relationship, and you should not act or rely upon any information appearing on this website without seeking the advice of an attorney.
