4 Legal Mistakes Entrepreneurs Make When Launching a Startup

When you have an idea for a business and you’re passionate about getting it off the ground, you may make a few legal mistakes in the name of getting ahead. But these mistakes can cost you big time.

Avoid making these four legal mistakes when launching your startup.

1. Not Getting Agreements in Writing

Eager entrepreneurs who want to get their operation up and running may be quick to accept a deal on a handshake, but that can lead to trouble in the future. Verbal agreements can be enforceable, but it’s a tricky to prove there was one in the first place.

Always get agreements – or anything, for that matter – in writing. Contracts are rarely disputed, and even fewer cases wind up in court.

Having an agreement in writing will save you time, frustration and money in the long run.

2. Not Incorporating at the Right Time

Forming a legal entity is par for the course when forming a business. After all, a formal entity will protect you from personal legal responsibility. But it’s important to choose the timing of your incorporation carefully.

There are costs associated with registering and maintaining a business, including government fees, taxes and legal fees. If you’re not ready to invest more time and money into your idea, then wait until you are to incorporate. Otherwise, the costs involved with just having a business – let alone running it – will outweigh the benefits.

3. Not Using a Professional to Register Your Brand

Registering your business and your brand, is an important and essential first step to getting your company up and running. But a lot of entrepreneurs make the mistake of registering their business without doing any research or hiring a professional.

What happens if there’s another business in your state with the same name that offers similar services? You may be forced to shut down your operation if this happens.

There are lawyers and business that offer company registration services to help entrepreneurs avoid these issues. These professionals will research your chosen name to make sure that it’s safe to use. They will also take care of other tasks, like registering your business or providing you with an agent.

Hiring a professional is the safest way to launch a business without worry that someday you’ll get a cease and desist letter in the mail.

4. Not Preparing for Employees

Many entrepreneurs make the mistake of hiring people without really being prepared for the logistics of it all. Some entrepreneurs also make the mistake of “accidentally” hiring employees.

You may think you’re hiring an independent contractor, but employment hierarchies and the scope of the job may make it otherwise.

Get familiar with the guidelines that the IRS uses to gauge employee status. When determining whether a worker is actually an employee, the IRS will look at:

  • How the worker does his or her job.
  • How the worker is paid.
  • Whether there’s a written contract.
  • The worker’s role in the business.

Major companies have made the mistake of classifying workers as independent contractors when they are really employees in the eyes of the IRS.

If you aren’t 100% sure a worker can be classified as a contractor, consult with a legal professional before moving forward.

While it may be tempting to take the shortest route to getting your company up and running, it’s important to take your time and do things right. Otherwise, you may wind up in legal trouble in the future, or worse – having to shut down your company.

Remember to get all agreements in writing, incorporate only when it makes sense to do it, register your company using the help of a professional, and get informed before you start hiring employees or contractors.