5 Legal Practices That Make Us Cringe

Five professional business people surrounding a computer, looking at poor legal practices

When you are running a business you often feel like you’re wearing every hat. Even if you have handed off a substantial amount of the work and responsibilities, most small business owners still feel like they are juggling product or service creation, customer service, marketing, worker management, human resources and legal concerns. Clearly, nobody can effectively handle all of those responsibilities, and any prolonged attempt could expose your business to some serious risks. It’s human to make some mistakes along the way, but the five things below could have a major impact on your business's long term success. Here’s some tips that might help keep you out of trouble. 

Failing to get the corporate formalities correct

Most businesses set themselves up as a limited liability company (LLC) or a corporation, and usually that’s easily accomplished by filing paperwork with the Secretary of State or Commerce. The problem is that’s where a lot of business owners stop, thinking that they’ve now done everything they need to do to set up their business and take advantage of limited personal liability. That’s not the case, you need to set up your internal governing documents (bylaws for corporations and operating agreements for LLC’s), separate bank accounts for the business, insurance if necessary, possibly a business license, and you’ll need to properly document corporate decisions and consents to certain actions. On top of that, ownership and management isn’t always set in stone so your governing documents will need to be regularly reviewed to make sure they still properly reflect the way your business operates. 

Misclassifying workers

This is a common problem that small businesses face. Often, businesses want to classify workers as independent contractors because it costs less, they don’t have to deal with paying taxes and it can reduce some exposure to potential lawsuits. All of that is certainly enough to entice business owners to use independent contractors over employees, but businesses run into issues when they try to classify workers who should be employees as independent contractors. There are regulations and guidelines from both the IRS and the Department of Labor, not to mention state agencies, that dictate who can qualify as an independent contractor and how that person can be managed; classifying someone as an independent contractor can be a moving target at best. 

Misclassifying independent contractors can lead to numerous issues, including wage law violations, tax trouble, anti-discrimination violations, worker’s compensation violations and others. Employees on the other hand are easy to classify, and employers are able to exert much more control over how, when and what employees are doing when they are on the clock. Of course, employees don’t come without issues, such as taxes, increased potential for lawsuits and higher costs. Make sure to carefully consider how workers used in your business should be classified, regardless of how you want them to be classified.  

Thinking your business has no legal issues or risks

I’m not suggesting that your business has a lawsuit that is about to happen, or you are going to be in trouble with the state or federal government, what I’m saying is you’ve got some legal risks involved in your business - everyone does. That doesn’t mean you need to put a lawyer on retainer, pay some lawyer a ridiculous hourly fee, or that you can’t handle the issues yourself. It simply means there are legal issues or risks that need to be addressed so they don’t come back to hurt your business down the road. 

What are the issues? It depends on your business; maybe you’ve got a lot of intellectual property and you need to know how to identify it and protect it, or maybe your business is heavily regulated and you need to ensure you are in compliance. Do it yourself, ignore it, hire a lawyer, whatever you feel is appropriate for your company, just don’t make the mistake of assuming that your business has no legal risks or issues that need to be addressed. 

No contract management

Everything needs to be in writing when it comes to your business, all of your agreements with people and companies, both inside and outside of your business. You are going to need to know what contracts or agreements to use for what situation, how you can use agreements to legally limit potential competition and protect your intellectual property. On top of that, the laws, interpretations and best practices around contracts and agreement change regularly, so you need a contract management system that regularly reviews and updates your contracts to make sure your business is as protected.  

Without a system to make sure you're protecting your business with contracts you’re at risk for decreased revenue, potential compliance issues, unnecessary exposure to liability and not protecting some of you business's most valuable assets. 

Not keeping an eye on legal as a regular aspect of your business

The thing with businesses and legal risks is that they aren’t really a one time fix sort of thing. Sure, you can get your company paperwork and governing documents set up when you get started, but if they aren’t reviewed and updated to reflect changes in the company structure and operations they aren’t going to do much good in protecting you from personal liability. Or, maybe you have all your business contracts set up when you started your business, but you’re offering different services, under different terms now and those contracts have become outdated and irrelevant; or maybe they haven’t been updated to reflect any new changes in the law. The point is, as your business grows your legal issues will change, or need to be adjusted to make sure you’re protected as you move forward. It’s not a one off and you’re good, it’s about setting up processes and procedures so your company can be protected in real time, proactively preventing issues that could arise

If any of these are an issue for your business it’s okay, it can all be cleaned up and taken care of so you can move forward. Making sure your company has a solid legal framework and risk management processes in place is worth the time and effort, and can keep you out of serious issues down the road. 


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