Thousands of small businesses open in the United States each year, but the number that survive and thrive for decades are in the minority. Many of these small businesses fail because small business owners make deadly legal mistakes, particularly in the early days—before and after they open their doors to customers.
Don’t be among the many small business failure stories. Avoid the five common but deadly small business legal mistakes described below, and your chances of success will rise significantly.
1. You Mixed Your Personal and Business Finances
Perhaps the most common and biggest legal mistake that a small business owner can make is mixing personal and business finances. The first step to doing this effectively is choosing the right business structure to reach your goals (e.g., sole proprietorship, partnership, limited liability company, or corporation).
Once you’ve formally formed and registered your business, you need to:
• Open a business bank account.
• Get a business credit card.
• Obtain an electronic identification number from the IRS.
• Create an accounting system and payroll system.
• Develop recordkeeping processes that ensure all of your personal and business transactions are separated from each other.
If you don’t keep your personal and business finances separate, problems will ensue. For example, you could miss tax deductions or make errors that could get you into a lot of trouble if the IRS ever audits you or your business.
2. You Never Obtained the Licenses and Permits Required for Your Business
Depending on the type of business you operate, the industry it’s in, what you sell, and where your business is located, the licenses and permits you’ll need will vary. If you don’t have the required federal, state, and local licenses, you could end up paying fines.
In some instances, failure to obtain a license could end badly with your business being shut down. Do your homework and get the licenses and permits you need to legally operate.
3. You Don’t Use Legal Documents and Agreements Drafted by the Right Attorney
There is a long list of contracts and agreements that you should use to protect you and your business. From employment agreements and non-disclosure agreements to customer invoices and vendor contracts, you’re exposing yourself, your business, and possibly your family to a significant amount of unnecessary risk if the documents and agreements you’re using weren’t drafted by (or at the very least, reviewed by) an attorney with experience in creating each specific type of document and agreement that you use.
4. You Never Created a Business Plan or Financial Strategy
How will your business survive over the next year? What about the next three years or the next five years? How will you make money? How will you grow your business? If you don’t have a business plan and financial strategy in place, then you’re throwing darts at a dartboard while wearing a blindfold. You might get lucky, but it’s far more likely that you’ll fail.
With that in mind, take the time to draft a comprehensive business plan and develop a financial strategy that supports the business plan. Get your financial projections in order and ensure you’ll have the cash flow your business will need. Otherwise, you’ll end up closing your doors.
5. You Didn’t Protect Your Valuable Intellectual Property
Every business has intellectual property and all intellectual property has the potential to become extremely valuable. However, the value could be lost if you don’t protect your intellectual property with trademarks, copyrights, patents, and trade secret protection programs.
Don’t be fooled by cheap trademark and copyright protection services or legal document services providers. The protection that these one-size-fits-all options typically provide is not adequate. By using a cheap provider, you save money today, but you you could end up spending thousands, hundreds of thousands, or millions of dollars more in the future when problems arise. Only an experienced intellectual property attorney can effectively help you protect your intellectual property to the fullest extent possible.