Small business owners and managers often fail to adequately address legal issues. This failure may be due to being busy with other matters, unaware or insensitive to legal concerns, or reluctant to spend the money to hire an attorney. Unfortunately, these companies can end up incurring substantial expenses or liabilities that could have been avoided with good legal planning.
Here are ten key legal mistakes that small businesses frequently make:
1. Not preparing corporate minutes.
To preserve the shield that protects shareholders from personal liability for corporate debts, a corporation must observe 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, particularly in the areas of officer compensation and benefits.
two. Failure to update the purchase order and invoice forms.
The lack of proper legal provisions on these forms could put the company in a weak legal position in the event of a payment or other dispute with a customer.
3. Lack of nondisclosure agreements with employees and contractors.
Much of the value of many startups lies in their intellectual property. Strong nondisclosure agreements are essential to protect that property.
Four. Lack of current purchase-sale agreement.
Almost any business with more than one owner must have a buy-sell agreement. A buy-sell agreement defines what happens after the death, retirement, or termination of employment of one of the owners, or when an owner wishes to sell his or her interest in the business. The absence of a buy-sell agreement may result in unintended consequences or a legal quagmire in such circumstances.
5. Lack of an updated employee handbook.
An employee handbook sets out the workplace rules, policies, and procedures related to the employment relationship. The lack of a satisfactory manual increases the risk of misunderstandings or legal violations, which can result in costly employee disputes, lawsuits, and government penalties. Additionally, a manual must be updated frequently to address changes in the law.
6. Failure to document transactions between the business and the owners.
Shareholders often conduct transactions with their corporations, such as real or personal property leases or loans to or from the corporation. Failure to satisfactorily document these transactions (as well as neglect to prepare regular minutes) can weaken the corporate liability shield or lead to adverse tax consequences.
7. Failure to update the bylaws and corporate bylaws.
Articles and statutes should be reviewed and amended from time to time to take account of legal changes. Otherwise, the corporation could find itself in violation of corporate laws or subject to cumbersome and outdated corporate procedures.
8. Lack of stock options or other capital plans.
The absence of well-designed capital incentive plans can make it difficult for a business to attract, motivate, and retain employees. A poorly written plan could also result in unexpected liability or expense for the corporation.
9. Inadequate estate planning.
With a closed business, estate planning by the owners should be done in conjunction with general business planning. Lack of proper estate planning documents can result in costly probate procedures or unnecessary estate taxes.
10. Failure to conduct a legal review of the website.
Depending on the nature of its business, a company should include the appropriate terms and conditions, copyright notices, legal exemptions, and a privacy policy on its website.
