Small business owners and managers often fail to adequately address legal issues. This failure may stem from being preoccupied with other matters, unaware or insensitive to legal issues, or reluctance to spend money on hiring a lawyer. Unfortunately, such a business may end up incurring large costs or liabilities that could have been avoided with good legal planning.
The following are ten major legal mistakes that small businesses often make:
1. Failed to Prepare Company Minutes.
To maintain a shield that protects shareholders from personal liability for corporate debt, companies must comply with formalities such as preparing regular minutes of the Board of Directors and shareholders. Lack of minutes can also jeopardize the validity of various corporate tax deductions, especially in the area of compensation and official benefits.
2. Failure to Update Purchase Order and Invoice Form.
The lack of proper legal provisions in these forms can put the company in a weak legal position in the event of a payment or other dispute with a customer.
3. Lack of Confidentiality Agreements with Employees and Contractors.
Much of the value of many startups lies in their intellectual property. A solid confidentiality agreement is essential to protecting the property.
4. Lack of Current Sale and Purchase Agreement.
Almost all businesses with more than one owner must have a sale and purchase agreement. A sale-purchase agreement defines what happens after the death, retirement, or termination of one of the owners, or when the owner wishes to sell his or her interest in the business. The absence of a sale-purchase agreement could result in unintended consequences or legal bog under such circumstances.
5. Lack of Up-to-date Employee Manual.
The employee manual establishes workplace rules and policies and procedures relating to employment relationships. Lack of satisfactory manuals increases the risk of misunderstanding or breaking the law, which can result in costly employee disputes, lawsuits, and government penalties. In addition, manuals need to be updated frequently to deal with changing laws.
6. Failure to Document Transactions Between Corporation and Owner.
Shareholders often make transactions with their companies, such as rental property or real or personal loans to or from the company. Failure to satisfactorily document these transactions (as can failure to prepare regular minutes) could weaken the company’s liability shield or lead to adverse tax consequences.
7. Failure to Update the Articles of Association and Bylaws.
Articles and by-laws need to be reviewed and amended from time to time to take into account changes in the law. Otherwise, the corporation may find itself violating company laws or subject to complicated and outdated corporate procedures.
8. Lack of Stock Options or Other Equity Plans.
The absence of a well-designed equity incentive plan can make it difficult for a business to attract, motivate, and retain employees. Poorly drawn up plans can also result in unforeseen liabilities or costs for the company.
9. Inadequate Regional Planning.
With a closely held business, estate planning by the owner must be carried out in conjunction with overall business planning. Lack of appropriate estate planning documents can result in expensive probate processes or unnecessary property taxes.
10. Failure to Conduct Website Legal Review.
Depending on the nature of its business, a company must include appropriate terms and conditions, copyright notices, legal disclaimers and privacy policies on its website.