8 Legal Issues That New Businesses Face
Starting a new business won’t work for everyone, but anyone who’s willing to face the challenges will find it rewarding.
Starting A New Business Comes With Many Unknowns
Starting a new business is exciting, but is often unchartered territory for entrepreneurs. Even with planning, many unexpected situations will creep into the operations of a business.
Some of these situations are manageable and won’t impact the business too much. However, others can be significant and may derail a business if not prepared. For instance, not understanding the current legal issues could lead to lawsuits or violations from government offices.
Costs can surprise business owners. When creating your business plan, you try to estimate costs accurately. Often, though, you can’t know your full costs until you start operating as a going concern. Business coaches often suggest adding a percentage over the estimate to account for these issues.
Cash flow is another component of business that’s in short supply. At Fora Financial, we can help ensure you have the proper cash flow for your operations. When your company experiences shortfalls in cash flow, you’ll spend unnecessary time trying to find the money. Call one of our Capital Specialists for a free quote to help solve any cash flow issues you may face.
Common Legal Issues That May Surprise New Business Owners
Small business owners are surprised by a number of legal problems when they start out. The following sections describe some of the common issues, and learning them can help your business stay safe.
1. Failing To Properly Incorporate
Incorporating your business can protect your personal property from lawsuits. There are two main types of corporations you can form: an S-Corporation and a C-Corporation. Usually, small business owners can qualify for an S-Corporation.
Another option is to register your business as a Limited Liability Company (LLC). With this option, you benefit from personal asset protection, but the procedures aren’t as formal as that of a corporation.
Why would you choose one form over another? If the plan for your business is to take the company public, you should choose the corporation.
Incorporating doesn’t protect the business from legal issues, however. It’s not a license for businesses to be irresponsible. It only protects personal assets.
Business owners must keep their personal and business finances separate. Intermingling funds between them can negate the benefits of incorporation.
Appending an “inc.” or “LLC” legitimizes your business. It also announces to other parties that your personal assets are protected.
2. Lacking A Comprehensive Operating Agreement With Co-Founders
Co-founders have an equal share of the profits and liabilities. This implied contract holds all of the co-founders responsible for the actions of each other. The only way to prevent this is with a comprehensive operating agreement.
When people decide to start a business together, they’re excited by the prospect of making money. However, many forget to hash out a formal agreement. Unfortunately, this leads to conflict and has ruined many business partnerships. If the partners were friends first, it can get in the way of their friendships, too.
By creating a comprehensive operating agreement, these issues can be avoided. It sets the boundaries for what’s permissible. Partners can remind each other of the rules when disagreements arise.
3. Failing To Have The Proper Legal Counsel
Most business owners aren’t skilled in the legal system. They feel that running a business is common sense. However, laws are open to interpretation, and any disagreement can land business owners in court. While certain business forms like LLCs and corporations can protect personal assets, they don’t protect a business owner from getting sued.
Sometimes, small business owners don’t believe that they have the same legal issues as larger companies. This misconception can get the small business owners into legal hot water and they may not seek legal counsel because of it.
Legal counsel will represent your business. Experienced lawyers know the laws, have litigated cases, and can workaround challenges from opposing lawyers. In addition, your legal team can often prevent your business from getting into a lawsuit to begin with.
4. Selecting A Company Name That’s Already Trademarked
Do a trademark search before you choose a business name, or ask your lawyer for help. If you use a name that’s already trademarked, you’re almost guaranteed to be contacted by the company’s legal department. If you’re lucky, you’ll receive only a cease-and-desist notice. Judgments for trademark name infringement are often quite significant.
The legal aspects are just one consideration when choosing a name. Most business owners will establish their brand, such as logos, letterhead, and other assets. These are often expensive for startups. If the business name is already trademarked, those branding assets would no longer be viable to use.
It pays not to assume anything when considering trademarks. You may be surprised to learn that the phrase “Taco Tuesday” is a trademarked name. A small taco company in California pursues a claim on this trademark aggressively. The phrase “Just Do It” is also trademarked and has become part of Nike’s logo.
5. Failing To Consider Intellectual Property Related Issues
Businesses protect their intellectual property (IP) rights. This asset is often the defining factor for a company. It’s a core component of how these companies earn their income.
Companies sue for large settlement amounts in an intellectual property claim, which is why checking for IP rights is crucial. In many cases, losing an IP case involves also paying legal fees of the opponent, which can be substantial.
Do you plan on offering live music in your bar or restaurant? Will the bands play cover songs? If so, your business will need to pay a licensing fee, which could cost thousands of dollars.
An action as simple as posting content from another website onto yours can get you into trouble. Copyright law allows for fair use. However, what constitutes fair use is open to interpretation.
6. Improper Or Minimal Permits, Licenses, And More For Your Industry
Most businesses will require licenses and permits of some sort. This alerts government entities that the business is complying with the laws. Some industries are subject to stricter laws that require more licenses and permits.
Business owners may not be aware of the permits they need for their businesses. Some business owners know about them, but choose to bypass the requirement. Sometimes, these businesses get away with not filing permits.
However, governments often discover businesses that are in violation. When this happens, they can shut down the business. That is a big risk to take. Working with governments is a hassle for business owners, but it’s a cost of doing business.
Even if the government doesn’t shut down your business, you can expect the fines and penalties for not complying to be severe. Once you’re cited for a violation, you’ll be on watch by the government officials. You can expect them to visit you frequently to ensure your business complies.
7. When Hiring, Asking Interview Questions That Are Illegal To Ask
The list of what you aren’t allowed to ask interview candidates is growing. It pays to learn what questions are permissible. When going on interviews, candidates often know what questions are allowed. If you cross the line, you may receive a visit from a state official and bad press.
If your business is growing and you need to hire people, consider finding a qualified human resource expert. This individual will know about the laws or stay up-to-date on new ones. A human resource expert can coach you on proper interview methods, including what questions are allowed.
Most interviewers know they aren’t allowed to ask a candidate’s age. In addition, you can’t ask about disabilities. Asking about finances, such as owning a home or renting, is also off-limits. These questions are just a subset of what isn’t allowed to be discussed in an interview.
Some interviewers try to get clever and ask questions in subtle ways to learn about a candidate. For instance, you may believe it’s okay to ask candidates when they graduated high school. This isn’t permissible, as it implies the person’s age. Most people graduate high school at age seventeen or eighteen.
8. If With Clients, Failing To Have Airtight Contractual Agreements
Does your business have clients? If so, it’s usually a good idea to use contracts when conducting transactions.
You could use templates found on the internet for your contracts. However, you may be committing your business to something you didn’t intend to do. Business owners who use these templates don’t always read them, which can be a costly mistake.
Contract law is complicated, and contracts are filled with legal jargon. Lawyers are trained to understand the jargon, but business owners usually aren’t. Find a good attorney who has extensive experience with contracts, preferably in your industry.
Our Final Thoughts
It’s difficult to anticipate every situation you’ll face as a new business owner. Using the information in this article can help you prepare, but it won’t account for every situation. When you understand that unexpected business situations can emerge, they won’t blindside you.
Trade associations and other industry-related groups can help you learn about the issues that business owners face. You can read about case studies or reach out to other owners.
Finding a coach or a mentor in your industry is one way to bypass many unknowns for your business. These experts have faced many situations and can guide you to the right solutions. They can also help you avoid mistakes made by newcomers to the business.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.