Starting a new business can be exciting, but it can also be fraught with legal pitfalls that could jeopardize the business’s success. Although most new business owners are focused on important issues, such as offering a strong product or service, identifying a strong target market, and establishing key business relationships, they often neglect to give due consideration to equally important factors, like (i) selecting the right business structure, (ii) registering trademarks and names, (iii) securing the requisite business licenses and permits, and (iv) drafting ironclad contracts that can withstand judicial scrutiny. Additionally, improper tax planning and accounting practices can lead to unnecessary liabilities. Being aware of the common legal pitfalls and taking proactive measures to avoid them can help entrepreneurs navigate the complexities of business ownership. Below, we explore several common mistakes that new business owners should seek to avoid.

1. Choosing the Wrong Business Structure

Most new business owners know that they need to start a business, but few know which business structure best suits their needs. There are several options to choose from, including sole proprietorships, various types of partnerships, limited liability companies, and corporations. Each structure has unique legal and tax implications, and choosing the wrong structure can result in personal liability, increased taxes, and limited options for growth. Below is a brief description of each entity.

• Sole Proprietorship: A sole proprietorship is an unincorporated business owned and operated by one individual with no distinction between the business and the owner. While this is the simplest structure to establish, it does not shield the business owner from personal liability for the company’s liabilities. Thus, the primary benefit of incorporation – limiting personal liability of the owner – does not exist with a sole proprietorship.
• Partnership: A partnership involves two or more individuals who share ownership of the business. Each of the co-owners or partners contribute something, usually money or real property, to the business endeavor. In a general partnership, the rights and responsibilities of the company are divided equally among the partners and each partner is responsible for the partnership’s debts and obligations. A limited partnership, by contrast, is composed of general and limited partners and allows each partner to determine and/or limit his or her personal liability. General partners have the right to manage the business, while limited partners generally are not responsible for the partnership’s actions, debts and obligations.
• Limited Liability Company (LLC): An LLC is a popular choice for many entrepreneurs due to its flexibility and protection from personal liability. LLC owners (called members) are generally not personally responsible for the company's debts and liabilities. Additionally, LLCs offer various tax advantages, such as pass-through taxation. Also, unlike corporations, an LLC is not required to hold regular stockholder or management meetings, and there are no requirements to comply with other corporate formalities.
• Corporation: A corporation is a more complex business structure, offering limited liability for shareholders and the potential for raising capital through stock issuance. However, corporations face more stringent regulatory requirements and can be subject to double taxation, meaning both the corporation and shareholders may be taxed on profits.

Choosing the wrong structure can have significant consequences. For example, a sole proprietorship might be tempting due to its simplicity, but the potential exposure for personal liability could be catastrophic in a sector that deals often with the public. Conversely, selecting a corporation or LLC without understanding the associated regulatory requirements can create administrative burdens. It’s essential for new business owners to consult with a legal professional to determine the best structure for their specific needs and goals.

2. Neglecting to Register the Business Name

While choosing a memorable name for your business is an exciting task, failing to legally register the name can lead to confusion, infringement issues, and potential lawsuits. When you fail to register your business name, you run the risk of another company with the same name suing you for trademark infringement. Additionally, without proper registration, you may have trouble protecting your business name from being used by others.

There are two key steps to properly registering your business name:

• Trademark Registration: To prevent others from using your business name or logo, it’s wise to register it with the U.S. Patent and Trademark Office (USPTO). A federal trademark offers nationwide protection and gives you the legal right to take action against infringing businesses.
• State and Local Registration: In many states and localities, businesses are required to register their name with the appropriate government agency, even if they’re not seeking a trademark. This step ensures that your business name is recognized and legally protected within your specific area of operation.

A failure to properly protect your business name can expose your brand to costly legal disputes and even force you to rebrand entirely.

3. Overlooking Business Licenses and Permits

Every business must comply with federal, state, and local regulations, which often require specific licenses and permits. Unfortunately, many new business owners neglect to secure the proper licenses and permits, which can lead to fines, penalties, and even business shutdowns. Below are some standard requirements that are often overlooked.

• Federal Requirements: Depending on the nature of the business, a new business may need to obtain federal licenses or permits. For example, some businesses involving importing/exporting or agriculture need specific permits from the U.S. Environmental Protection Agency.
• State and Local Requirements: Every state and locality has its own set of rules and regulations for business licensing. For example, businesses often need to obtain a county and municipal business tax receipt, a sales tax permit, or a professional license if you provide specific services. Failing to obtain the necessary permits can result in fines or prevent you from legally operating.

It's important to research the licensing requirements in your specific state and locality to ensure compliance with all relevant regulations.

4. Failing to Draft Proper Contracts

Another legal mistake that many new business owners make is failing to establish clear, legally enforceable contracts with employees, contractors, and vendors. Proper contracts protect both the business and the parties involved by setting clear expectations and avoiding misunderstandings. Below are common agreements that new companies should obtain.

• Employment Agreements: Every company should have detailed employment contracts to outline the terms of employment, responsibilities and renumeration given to each employee, as well as the company’s policies to which the employees must adhere.
• Independent Contractor Agreements: Unlike employees, independent contractors do not work as W2 employees, but provide services to, or on behalf of, the company. Contracts with these contractors should clearly outline the tasks over which the contractor has authority and discretion and how payment for such tasks is determined. It is critical that such contracts establish that the contractor – who has discretion over how its work is performed – is not an employee of the company.
• Vendor Contracts: When working with suppliers or service providers, a solid contract is essential to prevent misunderstandings regarding pricing, quality standards, delivery timelines, and other terms. Well-drafted contracts help ensure that both parties meet their obligations and provide a legal remedy if one party defaults.

Failing to put contracts in place may expose your business to unnecessary risks and costly disputes.

5. Neglecting Intellectual Property Protection

In today’s digital world, intellectual property (IP) is sometimes a business's most valuable asset. However, many new business owners fail to protect their IP, such as trademarks, copyrights, patents, or trade secrets, which can be detrimental to their brand and competitive advantage.

• Trademarks: A trademark protects your business's name, logo, slogan, or other distinguishing marks. Without registering a trademark, competitors could use similar names or logos, leading to brand confusion and potential legal battles.
• Copyrights: If your business creates original content, such as music, artwork, or written material, copyright protection ensures you have exclusive rights to reproduce, distribute, and display your work.
• Patents: If your business develops a new product or invention, a patent provides legal protection against others making, using, or selling your invention without permission.
• Trade Secrets: For businesses with proprietary formulas, processes, or strategies, protecting trade secrets is critical. Contracts and internal policies should outline how to maintain confidentiality and prevent unauthorized disclosure.

6. Not Seeking Professional Legal Help

Finally, one of the most significant mistakes new business owners make is failing to seek professional legal advice. While it may seem like an unnecessary expense, consulting with a business attorney early in the process can save a business owner from costly mistakes down the line. While it’s possible to start a business without legal counsel, it’s a risky endeavor. A qualified attorney can help you avoid the pitfalls that many entrepreneurs face and provide the expertise needed to safeguard your business.

Conclusion

Starting a new business is a thrilling and rewarding journey, but it is essential to approach it with careful consideration of the legal landscape. By avoiding common mistakes, such as choosing the wrong business structure, neglecting intellectual property protection, and failing to secure proper contracts, entrepreneurs can mitigate risks and set themselves up for long-term success. Consulting with legal and financial professionals early in the process will provide valuable guidance, ensuring that the business foundation is solid and sustainable.

If you are a considering starting a new business, or confirming that your new business is properly structured, call Law Offices of Moneyede Martin for help!