The first days of a new business are filled with decisions that can make or break a business. Along with a registration process, starting a new business comes with marketing, logistical, and legal decisions. While the latter may not be at the top of a new small business owner’s checklist, legal decisions can have positive and negative impacts on the health of the business. To avoid the negative consequences, avoid these common legal mistakes that small business owners make when starting a business.
Choosing a business entity without considering options
One of the most important decisions for any new business owner, choosing the business entity, has long-lasting legal and financial implications. There are many options, such as sole proprietorship, a limited liability company (LLC), partnership, and corporation. The type of business entity determines required documentation and tax payments, specifics of the resolution of liability issues, and whether raising money is possible. Choosing the wrong business entity can negatively impact both business and personal finances; contact an experienced business lawyer to determine the best business entity for the specific business situation.
Not drafting a partnership agreement
Entering into a business partnership is a common practice that can come with pitfalls, especially when a formal Partnership Agreement is not drafted. The Partnership Agreement is a legal document that should be drafted by a lawyer and customized for every party involved in the business. The document should include financial details, responsibilities of each partner, and information for a smooth conflict resolution and transition (if a partner wants to leave the business). All these details should be on paper; a verbal agreement or the absence of any Partnership Agreement can lead to serious conflicts and legal situations that could have been prevented.
Neglecting to put deals in writing
Documentation with other parties can feel like another unnecessary step, but actually serves as a protective safeguard. This applies even to subcontractors, which is often a necessary part of running a small business. Before subcontracting any work with other parties, contact an experienced business to draft a Confidentiality Agreement that ensures proprietary information is kept confidential and an Independent Contractor Agreement to put details of the arrangement down on paper.
Not establishing a hiring protocol
The hiring process comes with its own set of requirements. Specifically, certain paperwork needs to be obtained and kept on file. A business should also draft an Employee Offer Letter that spells out the details of the job, steps of conflict resolution, and includes any rules or regulations your employees need to be aware of. A few minutes of preparation and research can save a new business owner many headaches now and in the future.
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