Small business owners and managers often fail to adequately address legal issues. This failure can come from being busy with other matters, being unaware of or insensitivity to legal concerns, or a reluctance to spend the money to hire a lawyer. Unfortunately, such businesses may 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 often make:
1. Lack of preparation of corporate minutes.
To preserve the shield that protects shareholders from personal liability for corporate debts, a corporation must observe formalities such as preparing periodic minutes of the Board of Directors and shareholders. Lack of records can also jeopardize the validity of various corporate tax deductions, particularly in the areas of officer compensation and benefits.
two. Not updating invoice and purchase order forms.
The lack of proper legal provisions in these forms could place the business 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 start-ups lies in their intellectual property. Strong confidentiality 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 upon the death, retirement, or termination of employment of one of the owners, or when an owner wishes to sell the owner’s interest in the business. The absence of a buy-sell agreement can have unintended consequences or a legal quagmire in such circumstances.
5. Lack of updated Employee Manual.
An employee handbook establishes the rules and policies of the workplace and the 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 sanctions. Also, a manual must be updated frequently to deal with changes in the law.
6. Lack of Documentation of Transactions between the Corporation and the Owners.
Shareholders often enter into transactions with their corporations, such as leases of real or personal property or loans to or from the corporation. The lack of satisfactory documentation of these transactions (as well as the negligence in the preparation of periodic minutes) can weaken the corporate liability shield or have adverse tax consequences.
7. Lack of Updating of Corporate Articles and Bylaws.
Articles and statutes must 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 stock plans.
The absence of well-designed equity incentive plans can make it difficult for a company to attract, motivate, and retain employees. A poorly written plan could also result in unexpected liabilities or expenses for the corporation.
9. Inadequate estate planning.
With a gated-property business, estate planning by the owners must be done in conjunction with general business planning. Lack of proper estate planning documents can result in costly probate proceedings or unnecessary estate taxes.
10 Breach of website legal review.
Depending on the nature of its business, a company must include appropriate terms and conditions, copyright notices, legal disclaimers, and a privacy policy on its website.