Many business owners try to cut costs wherever possible, which is more than understandable. The overhead on running even a small business can make generating profits a challenge.
One of the first corners to be cut is often legal advice. Some entrepreneurs deem it an unnecessary expense. The fact is, however, that failing to follow the letter of the law can end up being a lot more expensive than an attorney’s fees.
As your business grows and operations expand, it is quite common for business owners to find that the legal complexities have increased dramatically, beyond their knowledge base.
Keeping an eye out could be tedious but is you manage to avoid some of the most common legal mistakes business make you could save yourself a lot of trouble and money. Here’s a few of the mistakes that can be easily avoided.
Unnecessarily Complex Structuring
The best way to avoid complex legal trouble down the line is to ensure the structure of your business is as simple as possible. Some of the largest businesses in the world have the most straight forward capital structures, and for good reason. It could be tempting to give into demands of either banks or investors when you’re desperately seeking funding, but it only adds to the unnecessary drains on your business. This advice also leads into the next common mistake we have on our list – over dilution.
Over Diluting
It’s a common mistake to treat your company’s stock as a form of supercharged currency, but it could lead to a lot of issues you may not consider now. Every time you part with stock it’s important to bear in mind that the person involved in the transaction is going to be a part of the business, potentially for the rest if its life.
It’s not always bad to use stock as a negotiation tool to attract the best talent and get the best deals but try to minimize these transactions as much as possible. The future value of your entire business is locked in these instruments and giving it away for short term benefits may not be the wisest decision. Not to mention the fact that the relation you have with your suppliers and employees may change drastically when they effectively become part owners of your business. Moreover, as minority owners, the law grants them rights that you may not understand.
Inadequate Filing
Try not to use the cookie cutter and boilerplate websites to print out forms for your regulatory filings. It may seem like a quick and convenient way to avoid hiring a lawyer, but those boilerplate filings may not hold up in a courtroom. Items on the Internet might be free, but they might be drafted for a state other than where yours is domiciled and may not have been updated for changes in the law. You could be leaving yourself open to liability if you haven’t filed your incorporation documents properly as the corporation doesn’t protect your personal liability in that case.
Careless Filing
Being careless with the way you file your regulatory documents is crucial as well. Minor mistakes could hinder legal proceedings if you ever have to enter court to defend against litigation. This also includes tax returns that you file for the business which, of course, are of the utmost importance.
Choice of Jurisdiction
An unwise choice of jurisdiction is particularly common among online businesses. Choosing the state in which to incorporate could be tricky. If it’s a brick and mortar operation, your safest bet would be to incorporate in the local jurisdiction. It is highly recommended that you seek legal advice if you haven’t already chosen one, just to make sure you pick the state best suited to your type of business.
Failure to Protect Goods & Services
When you sell a good or service to a customer, it’s critical that you ensure that there is a written contract between you and the client to cover all corners when it comes to protecting your business. Not only is this a good way to account for all your transactions so that you can go back to them at a later date, but it’s also key in ensuring clients and customers stick to the agreements made at the time of the transaction. A simple clause can mean the difference between unlimited liability or having to litigate in a far off jurisdiction. The next common mistake is similarly related to your suppliers.
Not Formalizing Business Relationships
Once you’ve been in business for a while, you will have developed a network of close relationships and arrangements with a number of suppliers, contractors and employees. Every time you form such a relationship, take the time to form a contract that can solidify the agreement while protecting you from potential tax liabilities in the future. It’s also a good way to ensure your employees understand what’s expected of them and what they can reasonably expect from you. This goes a long way in protecting your business. Again, laws vary by state and you can run the risk of nasty surprises without competent legal counsel.
As a business owner, it’s key that you have some basic understandings of the law. But given the fact that your main focus is on running your business, it’s also wise to have an attorney in your corner to make sure you avoid any mistakes that could rob you of the success you have been so diligently pursuing.
Andrew May is a finance and business attorney in Chicago and the founding member of May Law. When he’s not serving his clients, Andrew frequently contributes to several online publications for investors and entrepreneurs. For more info, visit www.mayLawpc.net.
Julian is a technology and software enthusiast. He created Mp3Tagz.com to provide in-depth guides and reviews on the best digital music software on the internet.
