Share on facebook
Share on twitter
Share on linkedin
Share on whatsapp

5 common legal mistakes small business owners make (and how to avoid them)

The saying “we learn from our mistakes” is fine. But for many small business owners, making them can prove disastrous. 

One financial mistake, too many, and we’re toast!

The problem is we wear many hats, and our days are busy managing employees, dealing with customers, chasing suppliers, or handling finances.

And sometimes, some of us leave legal issues on the long finger.

But that can prove costly.

A better approach is to implement what Eleanor Roosevelt saidlearn from the mistakes of others,” because then we can avoid them!

After all, ‘prevention is better than cure,’ right? 

Okay, with those wise words in mind, let’s look at the 5 most common legal mistakes small business owners often make so you can avoid them.

#1 Using the wrong business structure

A business structure refers to how you set up and run your company.

The 4 most common business structures are:

  • Sole proprietorship
  • Single-member LLC
  • Multi-member LLC/Partnership
  • S or C Corporation 

Few small business start-ups need a corporation’s structure. Many begin with a sole proprietorship, upgrading to an LLC or partnership when business demands. 

But there are several problems with this approach: 

  • Selling your business- I ran my first landscaping business as a sole proprietorship. It cost me when I wanted to sell because, in reality, a sole proprietorship doesn’t have shares and isn’t a tangible asset.
  • Liability- The sole proprietorship structure provides zero liability protection. Your assets are at risk should someone sue or you go bust with outstanding loans.
  • Higher tax-Some structures don’t offer the ability to split income or reinvest profits into the business, resulting in higher tax bills.
  • Minimum property gains tax: If you sell your business and its assets using the wrong business structure, you could pay more in capital gains tax.

For further tax information, visit the links below:

#2 Not protecting intellectual property

Trademarks, patents, and copyrights are all forms of intellectual property, and if you don’t register yours with the United States Patent and Trademark Office (USPTO), someone else could!

Here’s a quick breakdown of what each means:

  • Trademarks-Protects images, words, sounds, and colors like logos, business names, taglines, and slogans that distinguish a brand’s product or service. 
  • Patents-Protects original inventions from the use of others and cover a wide range of things, from plants to machinery and product designs (think Coca-Cola’s original bottle) to fonts. 
  • Copyright-Protects the creator’s rights of original intellectual property works, such as poems or songs.

Without proper protection, other brands can use your intellectual property without permission, leading to lost revenue, damage to reputation, and a loss of control over the business. 

For example, suppose you don’t trademark your logo! Another business could use a similar one or steal your exact designs, causing customer confusion and diluting your brand. 

To protect your intellectual property, take the following steps:

  • Conduct a thorough search on the USPTO website to ensure your business’s trademarks, logos, and branding do not infringe on existing intellectual property rights.
  • Register trademarks, copyrights, and patents with the USPTO to secure your legal ownership and the right to use intellectual property.
  • Ensure another brand isn’t using your intellectual property; it’s your responsibility. If you don’t police your logo, you could lose it.
  • Take legal action to enforce intellectual property rights if necessary.

By taking these steps, you’ll protect your intellectual property and help secure the long-term success of your business.

#3 Neglecting legal documentation or notifications

The IRS and other government agencies do not accept business owners saying, “It must have got lost in the post, or I can’t find it,” as an excuse for not replying or complying with legal notifications. 

Legal documentation and notifications refer to written agreements, contracts, tax forms, notices of due process, and other legal documents that govern the operation and management of a business. 

Neglecting them can cause legal and financial consequences, including disputes with partners, employees, customers, or worse, the IRS!

Here’s how to avoid this mistake:

  • Create a comprehensive set of legal documents, including operating agreements, contracts, and employee handbooks, to govern the operation and management of the business, then file them where you can find them. 
  • Ensure all business members/owners sign legal documents like your operating agreement.  
  • Review and update legal documents to reflect business changes and ensure compliance with relevant laws and regulations.
  • Store all legal documents in a secure, accessible location, such as a virtual data room, cloud storage platform, or with your lawyer or accountant. 
  • Seek the advice of a legal professional to ensure that all legal documents comply with relevant laws and regulations.

The success and longevity of your business depend on maintaining a comprehensive set of legal documents that outline how you’ll run your business. If you don`t keep them, your state of registration could dictate what happens in cases of member or ownership disagreements. 

#4 Ignoring employment and labor laws

Employment and labor laws are complex regulations that govern employers’ and employees’ relationships. Ignoring them can lead to fines and lawsuits and damage your business’ reputation.

So, it’s best not to!

To ensure you don’t, take the following steps:

  • Familiarize yourself with employment and labor laws that apply to your business, industry, and location, including minimum wage, overtime, and anti-discrimination laws.
  • Develop and implement a human resources policy that complies with all relevant employment and labor laws.
  • Train managers and supervisors on the requirements of employment and labor laws, including handling employee complaints and grievances correctly.
  • Review and update your human resources policy and employment practices to ensure compliance with relevant laws and regulations.
  • Seek the advice of a legal professional to ensure that your business complies with relevant employment and labor laws.

Your aim here is to protect your business from legal and financial risks and ensure you’re operating consistently with state and federal law. 

Let’s finish with the mistake many small business owners make, only to find out when it’s too late. Yup, insurance.

#5 Not having adequate insurance coverage

Insurance is essential for protecting your business from various risks, including property damage, liability claims, and loss of income. 

And not having adequate insurance coverage can cause significant financial losses, the failure of the business, and, if you are liable (sole proprietor), even your house. 

Here’s how you avoid that from happening 

  • Begin by assessing the risks your business faces, including potential liabilities and loss of income, to determine the types and amounts of insurance coverage you need
  • Research insurance options and compare coverage, limits, and costs to determine the best policies for the business. Check out policies that combine professional and general liability to get the best deal. 
  • Next, purchase an insurance policy that provides adequate coverage for your business, including liability insurance, property insurance, and business interruption insurance.
  • Review insurance coverage and make changes as necessary to ensure your business has adequate protection.
  • Seek the advice of an insurance professional to get guidance on complex insurance issues to protect your business from financial losses.

NOTE: Small businesses with employees must have (employer’s liability insurance) to cover medical costs, and lost earnings should employees get injured at work.


We small business owners know how hard it is to run a business. 

The last thing we need is unnecessary and unwanted financial costs because of avoidable legal mistakes.

Yeah, sure, we gain experience from our mistakes, but now you know what they are; avoid them. 

Because as the great Oscar Wilde once said, “Experience is simply the name we give our mistakes.”

Good luck.

Share on facebook
Share on twitter
Share on linkedin
Share on whatsapp