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What should you know as a small business owner

Protecting Your Business From Legal Mistakes Small Business Owners Make!

Starting a new business is fun and exciting. It also means that you are investing time, energy and money into it. There are several mistakes that small business owners make that can have a huge impact on their business. Success often comes from doing a good job and avoiding expensive lessons easily learned. These are the top 10 legal mistakes small business owners make.

1) Not Reading Contracts

Small business owners often make the legal mistake of not reading contracts BEFORE they sign them. Failing to read contracts can lead to several negative consequences. This is a key legal mistake that small business owners make because of the risks. These issues come up in service contracts, maintenance agreements, business purchase and sale agreements, share purchase agreements, supply contracts and more.  Some of the possible consequences include:

  • Facing unknown costs
  • Being obligated to do something
  • Beaching a contract inadvertently
  • Having few enforcement rights
  • Dealing with unfair / one-sided penalties

2) Failing To Incorporate

There are many advantages to incorporating. The two main advantages are to lower taxes and reduce personal liability. Many people will have an idea that “someone” told them is the right way to determine if it is beneficial to incorporate. If you were going to read one article on the benefits and/or advantages of incorporating your small business as an owner, it should be these two:

The downside to incorporation is the expense of the incorporation. This can cost  (under $1100) done properly by a lawyer, the annual filing fees and minute book resolutions (under $500/ year) and the cost of tax filing preparation if you do not do your own taxes.

3) Failing To Have A Lawyer Review Your Lease

Arguably, failing to have a lawyer review your lease agreement before you sign any binding agreement falls under the “not reading contracts” top 10. This happens so often, that it is also a key legal mistake small business owner’s make. Most businesses require space to operate out of. Most small business owners do not have the capital to start a business and buy the land and/or building that is needed. Lease agreements can be very one sided. They may have provisions that are hidden and have very significant financial repercussions for small business owners. Some leases have terms (or lack terms) that fundamentally will not allow a business to operate in the location that they have just leased. Others will have performance obligations that will be costly to perform, and can bankrupt a business if the landlord performs them and then enforces their costs and penalties on the tenant. Lastly, the monthly costs associated with net, net net and triple net leases may be the difference between financial success and losing your business.

4) No Unanimous Shareholder Agreement / Buy-Sell agreement

The entire future of a company may lie on the plans that the shareholders put together to avoid fighting between themselves. A buy-sell agreement may be stand alone or form part of a greater unanimous share holder agreement (USA). Not only can a USA lead to a peaceful resolution in the face of shareholder disputes or disagreements, they also avoid some problems altogether. In situations that involve the death, bankruptcy, divorce, or loss of capacity of a shareholder, these agreements allow for the successful continuation of the business. If these is more than just you in a company, these legal mistakes small business owners make can be easily avoided.

5) Not Protecting Your Intellectual Property

Trademarks, patents, copyrights, and trade secrets can all be extremely valuable assets of a company.  The forms of intellectual property include, client lists, blue prints, drawings, logos, distinctive word marks, unique formula, processes and more. Maintaining your legal right to protect these assets is key. Once lost, they are often lost for good or it may take very costly litigation to secure them back again.

6) Failing To Have Non-Competition Agreements, Non-Solicitation And Nondisclosure Agreements

These three agreements protect the company from competition. Using them helps avoid legal mistakes small business owners make easily and inexpensively. They help keep confidential information protected. They define what is allowed of employees and contractors once they cease working for a company. These agreements even allow competitors to learn more about a company in a potential purchase of it, while protecting the intellectual property of the company.

7) Lacking Employment Law Procedures

Employment contract, policy manuals, and following proper reprimanding processes are all key elements to avoiding employment law issues down the road. One of the legal mistakes small business owners make is falsely assuming that corporate liability protection is perfect. One aspect involves employee salaries. Failing to pay employees allows the employees to circumvent the liability protection afforded by corporations in most instances.

8) Failing To Have A Law Firm Keep and Maintain Your Minute Books

There are many reasons why this makes the top ten list. Firstly, not having the registered office of a company in the hands of an office that is open even when small business owners are on vacation is key. Second, the preferential tax treatment of corporations (and distributions to shareholders) may be lost, if a minute book is not properly maintained. Lastly, the ability to sell the company, finance growth or prove that the corporation is a valid legal entity in cases where minute books are not up to date. Learn more about 10 reasons this is Extremely important for your company.

9) Using The “Wrong” Ownership Structure

Ownership structure may involve many aspects of a business. First, it involves, what structure a business venture will take. Incorporations, joint ventures, partnerships and sole proprietorships are some of the forms that a business venture may take. Some structures operate better than others depending on the situation. Next, the share structure in a corporation is important for tax and control purposes. Financially, the losses incurred by poor corporate structure planning can equal tens or hundreds of thousands of dollars.

10) Failing To Get (Or Follow) Legal Advice

Reminding clients to never send an email that is written in All-Caps is sage advice. So is reminding them to always read contracts before they sign them. Before making significant decisions or reacting to conflict situations, it is important to get proper legal advice. Some clients will ask for advice and then decide not to follow it. Of course it is a client’s prerogative but they should not be surprised if they end up being sued or having other significant consequences.

Help Avoiding Legal Mistakes Small Business Owners Make

Call today so that the Kahane Law Office corporate lawyers in Calgary, Alberta can help you avoid legal mistakes small business owners make. You can reach us at 403-225-8810 locally in Calgary, Alberta or toll-free at 1-877-225-8817 or email us directly here.