June 14, 2022

When starting or running a business, there are a bunch of hoops to jump through and things to keep track of throughout the process. That is why you want to make sure you’re not making any legal mistakes while getting your business set up.

To check if you’re doing everything right, here are some of the biggest legal mistakes business owners make that you should avoid:

Not Incorporating – Failing to separate business from personal expenses

Many businesses don’t incorporate, which means their personal assets are not shielded from business assets. So, if you find yourself in a lawsuit, you could lose personal property and business assets.

Depending on your type of business, you have three options for incorporating: Corporation, Partnership and Limited Liability Company (LLC). Each one requires formal documentation and must be filled with the Division of Corporations.

If you go with corporation, it can either be a C Corporation or an S Corporation. A C Corporation is a common option for companies who need venture funding and has flexible profit-sharing, while an S Corporation offers flexibility in accounting methods and setting owner salaries to minimize Social Security and Medicare taxes. The difference between the two is how they’re taxed.

A Partnership requires at least two owners. If you are going to have a partner, make sure that you have a detailed partnership agreement describing each partner’s financial contributions, responsibilities within the company, and the process by which partners can exit the company. Not documenting these details can be catastrophic, especially when your business evolves and problems arise.

An LLC offers flexibility in tax elections and management in company. It combines the management authority of partnerships with the liability protection of corporations.

Also, make sure to separate business expenses from personal ones so you don’t get in trouble with the IRS. You can do this through setting up a business debit or credit card, separating receipts and keeping them, keeping track of using personal items for business and paying yourself a salary from business account.

No Tax Strategy

Another legal mistake businesses make is not having a tax strategy. When developing one, work with either a tax attorney or tax strategist. Keep in mind, your tax election matters and you should have someone on your team who understands how business and tax intersect. Tax elections can affect what you can and can’t do. Proactive tax planning can not only save you thousands but also keep out of trouble with the IRS.

Not Engaging with an Experienced Business Attorney

When you think of getting an attorney, one of the first things you think is they’re too expensive. However, the truth is you would spend less to work with an attorney up-front while building your business than you would to resolve a legal issue that appears later.

Some of the legal obstacles an experienced business attorney can help you with include:

  • Protecting intellectual property
  • Creating rock-solid contracts
  • Making sure you’re not infringing on trademarks or violating intellectual property rights of another business
  • Following legal steps when hiring employees
  • Developing non-disclosure agreements (NDAs)

Taking the necessary steps to ensure you’re not making any legal mistakes while developing your business will not only save you money, but also keep you out of trouble.

Source: Samuel Bryant, “10 Biggest Legal Mistakes Business Owners Make” webinar

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