Common Legal Mistakes Made by Entrepreneurs (and how to avoid them!)
The new year is all about fresh starts, so I thought it would be a great chance to not only highlight some of the common legal mistakes I see made by business owners, and how to avoid them.
But first, before we dive into this blog, please give yourself a little bit of grace when it comes to the topic of legal mistakes and legal issues in business, because you didn’t go to law school and this is probably not your area of expertise!
When I’m having client calls, my clients are often embarrassed by their questions or feel shame around not having the legal side of their business sorted out.
Reminder: you were not born knowing this! However, the fact that you’re reading this, asking questions, and putting the time and energy into learning more and get your legal bases covered – well, you deserve a pat on the back.
Now, while this blog is highlighting common legal mistakes made by entrepreneurs, it doesn't mean you need to deep dive into this topic (there are lawyers and attorneys for that!) Instead, I want this blog to help you issue spot, prioritize what you need to work on or get help with, and even maybe have a couple of quick wins.
12 Common Legal Mistakes Business Owners Make
As a lawyer for small businesses, I’ve seen my fair share of legal mistakes. This list of legal mistakes is meant to help educate you so you know what to look out for, how to take action to protect yourself, and what areas of your business you may need to prioritize. You know the old saying - if you know better, you do better.
1. Getting too attached to your business and brand name before doing all the important searches.
Choosing a unique business name is getting harder and harder. So before you settle on your business name and daydream about your branding details, be sure to do a thorough search first to make sure the name isn't being used by anyone else in the same or similar industry to you. A Google search and search of the biggest social media platforms (Like Instagram, TikTok, Twitter and YouTube are a good start). Beyond those, you should also check your local and federal business name registration searches and conduct trademark searches (federally) as well.
Trademarks are not the same as a website domain name, social media platform handle, etc. These are all great to have in place to help consumers identify your business and establish your brand, but having a website domain or social handle is not the same as having a registered trademark.
While a full business registration and trademark discussion is beyond the scope of this blog, you should be doing a thorough search before shelling out lots of money for branding you might not be able to use, or worse be sued for trademark infringement.
Another common legal mistake business owners make is not using solid contracts. In order to protect yourself, be sure to get solid contracts in place with any employees, service providers, clients, etc, to get your agreement in writing.
2. Not Using (Legit) Contracts
You knew using great contracts would be high on my list, didn't you? Make it easy by incorporating this into your client process and workflow or your onboarding when working with an employee or service provider. Ensure that your contract is through and includes important details like payment terms, cancellation clauses and how your clients can use your deliverables, if you are creating unique works for them.
Your contract should set also clauses outlining what happens if a client pays late, your communication preferences, and timelines for deliverables, including timelines if your client needs to provide you with anything before you can start your work. Setting out your client processes up front can also really help you weed out bad clients, which we dove into in this blog.
3. Not Registering your Business
Another common legal mistake is business owners not registering their business. Even if you are a sole proprietor, you need to register your business name. If you are operating under any name other than your exact legal name, you need to register your business name. For example, if my business name was “Jaime Bell,” I wouldn’t need to register it. However, if I used “Jaime Bell Contracts,” I would need to register the business name. Your local jurisdiction might also require you to register for a business license, so check out your local requirements too.
A reminder that registering your business name in Canada doesn't give you any name protection, meaning someone could incorporate a company using your business name, so if you are worried about name protection, you should consider a trademark registration (and talk to a lawyer or attorney for this!).
4. Not Opening a Separate Bank Account
As a business owner, it’s important that you treat your business like a business, and one of the first steps you should take in doing this is opening up a separate business bank account. Whether or not you incorporate or are operating as a sole-proprietor or partnership, you should always open a separate bank account.
Opening a separate bank account allows you to properly keep track of expenses, income, and by keeping your business and personal expenses separate, it will make your life a lot easier come tax time and save you from potential tax issues if you are audited. Plus, you'll make your accountant and bookkeeper much happier!
5. Using Other People's Copyrighted Material (Illegally!)
In a world full of content, creators, and so much information, it can be hard to figure out what you can and can’t use. It’s important to be really careful with content and ensure that you are getting the appropriate image licenses, music licenses, referencing the original creators of a piece of work, etc. The last thing you want is to get sued for copyright infringement. This includes ensuring you have appropriate font licenses for your site and branding. If you are hiring someone to do your branding, website or manage your social media, ensure they are well versed in the proper use of content to avoid copyright infringement!
6. Not Charging the Right Sales Taxes
When you start your business, it's your job to figure out what, if any, taxes you need to be charging on your products and services! This is especially a common mistake I see when it comes to charging sales tax on digital products. If you're not sure, check with your accountant or tax expert. You don't want to find this out the hard way and be hit with a huge tax bill at the end of the year!
7. Not having a Partnership Agreement or Shareholders Agreement
(AKA, a business pre-nup).
Going into business with other people can be tricky. Don’t make the legal mistake of not having a Partnership or Shareholders Agreement in place. This helps establish each person’s role in the business, how much money is going in and out, how you are reinvesting profits, what happens if someone wants to leave the business, who gets the email list, etc. It is SO much easier to have these hard conversations at the beginning of a relationship, than at then end when the relationship might have turned sour. Take the time at the beginning to talk about the hard topics. You might just find out it's not a great fit in the first place.
9. Signing Agreements Without Reading the Fine Print (or having a lawyer read them first!)
You may be tempted to rush through and sign the contract as fast as possible so you can get to work with a client or provider, but PLEASE, don’t rush this. It’s totally NORMAL in big companies to write back and say, “Thanks for the contract. We’ll be in touch in a few days after we review and run the contract by our lawyer.” Can we please normalize this for small businesses and online businesses, too?!
You NEED to understand what you’re signing, what you’re agreeing to, how you can get out of the contract if need be, how your intellectual property rights are impacted, etc. If you don’t feel comfortable reading contracts, consult a lawyer or legal counsel to help you.
It’s very normal for businesses to borrow or use cut and paste contracts, so who knows where the other side got theirs or if it’s legal and legit. It’s rare that negotiation kills a deal, so don’t be afraid to speak up if something feels off to you.
10. Sharing too much (Without Using a Non-Disclosure Agreement)
NDA’s (non-disclosure agreements) are extremely important in protecting your unique business ideas and creations. While not every business or situation warrants an NDA being in place, there are several instances where it is essential.
A good rule of thumb is that, before sharing information, ask yourself: If this information were shared with a third-party, would cause me or my business harm? If the answer is yes, it's a good idea to use a Non-Disclosure Agreement.
11. Not Getting Business Insurance
In business, just like in life, you can only do so much to protect yourself. There are always situations and risks that you can’t control, which is why it’s so important to invest in the proper business insurance. There are so many types of business insurance out there.
In the online business world, it’s important to assess your cyber risk when determining what types of business insurance policies to take out.
I recommend online business owners look into getting cyber liability insurance, general liability insurance, and/or professional liability insurance. There are also several other additional coverage options you can look into. You can learn more about how to assess your cyber risk and check out more business insurance options in this blog post.
12. Waiting too long to get Legal Advice
I know it can be overwhelming and expensive to get legal help, but the reality is, is that the cost of NOT asking for legal help can be so much more expensive in the end if you were to make a serious legal mistake or get sued without having the proper legal protection in place.
I created Contracts Market to be a legal resource for you both with free information and affordable legal contract templates so that you can ensure you avoid legal mistakes and give your business the protection it deserves.
But, often you need more than just a contract template or generic information. You need a lawyer or attorney to give you advice for your specific situation. Don't wait too long to reach out.
And there you have it! 12 of the most common legal mistakes I see entrepreneurs make, and how to avoid them!
If you’re needing to implement professional, lawyer-drafted contracts that are easily customizable and simple to understand into your business, check out our customizable and easy-to-use contract templates for business owners here.