Starting and growing a small business involves countless decisions—many of them made quickly and under pressure. It’s easy to focus on operations, sales, or marketing while legal concerns take a back seat. But even seemingly minor legal missteps can lead to costly consequences later on.
Whether you’re launching a new venture or running an established company, avoiding common legal pitfalls can save you time, money, and stress. Below are some of the biggest legal mistakes small businesses make—and how to steer clear of them.
1. Choosing the Wrong Business Structure
Many entrepreneurs start their business without properly considering what legal structure is best for their needs. Sole proprietorships may seem simple and inexpensive, but they don’t offer personal liability protection. On the other hand, forming a corporation or LLC without understanding the tax and compliance implications can lead to unnecessary complexity or costs.
How to avoid it:
Work with a legal and financial advisor early to evaluate your options. Factors to consider include liability, taxation, ownership structure, and long-term goals. Choosing the right structure from the start can help you grow with confidence.
2. Failing to Formalize Agreements
Handshakes and verbal agreements may seem sufficient among friends, partners, or early clients—but they offer little protection when disagreements arise. Whether it’s a co-founder arrangement, vendor contract, or client agreement, relying on informal deals is one of the most common and costly mistakes.
How to avoid it:
Put every important agreement in writing, no matter how simple it seems. A properly drafted contract outlines expectations, protects all parties, and provides a clear path for resolving disputes. Even basic service agreements or partnership terms should be reviewed by a legal professional.
3. Overlooking Intellectual Property Protection
Many businesses underestimate the value of their name, logo, website content, product designs, or proprietary processes. Failing to secure intellectual property (IP) rights early can result in stolen ideas, branding conflicts, or expensive rebranding down the road.
How to avoid it:
Take steps to protect your IP as soon as it’s created. This may include registering trademarks, securing copyrights, or filing for patents when applicable. Also, ensure that ownership of creative work (like designs or code created by contractors) is properly assigned to your business through contracts.
4. Misclassifying Workers
Improperly classifying workers as independent contractors when they should be employees is a frequent and risky mistake. It can lead to penalties, back taxes, and wage claims—especially if a disgruntled worker reports the issue to regulatory agencies.
How to avoid it:
Understand the difference between an employee and a contractor based on your state’s laws and IRS guidelines. If your business controls how, when, and where the person works, they’re likely an employee. When in doubt, seek legal advice to review your staffing practices and classification policies.
5. Ignoring Employment Laws and HR Requirements
As soon as a business hires its first employee, it becomes subject to a range of labor laws—covering everything from minimum wage and overtime to anti-discrimination and harassment policies. Failing to comply can result in lawsuits, audits, or fines.
How to avoid it:
Develop clear, compliant HR policies and employee handbooks. Stay informed about federal, state, and local labor laws. If your business is growing, consider consulting with an employment attorney to help create systems that protect your company and your team.
6. Using Generic or Inadequate Contracts
It’s tempting to grab a free contract template from the internet and fill in the blanks. But contracts should be tailored to your business’s needs and risks. A poorly written or overly broad agreement may not hold up in court—or may leave out crucial protections.
How to avoid it:
Have contracts reviewed or drafted by an attorney familiar with your industry and goals. Every agreement—from NDAs to service contracts to lease agreements—should clearly define terms, responsibilities, and consequences in case of breach.
7. Neglecting Compliance and Licensing
Each business type and location comes with its own set of licensing, zoning, tax, and compliance obligations. Many small businesses unintentionally operate out of compliance—until it’s flagged by a regulator or competitor.
How to avoid it:
Do your due diligence to ensure your business has the necessary permits and is meeting all state and local requirements. Maintain good records and calendar important filing dates, like annual reports or tax deadlines. Legal guidance can help ensure nothing slips through the cracks.
8. Delaying Legal Help Until There’s a Crisis
Many business owners avoid hiring a lawyer until they’re facing a lawsuit, government investigation, or serious conflict. By that point, options are limited—and legal fees are higher.
How to avoid it:
Treat legal guidance as part of your business strategy, not just damage control. Proactive legal planning helps prevent problems before they start and gives your business a stronger foundation to grow on.
Final Thoughts
Legal issues don’t just affect large corporations—they impact businesses of all sizes, often when least expected. By recognizing the most common legal mistakes small businesses make, you can take the right steps to protect your operations, reputation, and bottom line.
Investing in solid legal groundwork now can help you avoid bigger problems later. Whether you’re just starting out or already growing fast, a little foresight—and the right legal advice—can go a long way. We recommend Grant, Riffkin & Strauss, P.C.