Overview

Starting a business is exciting, but it can be tricky when it comes to legal stuff. Many new entrepreneurs don’t realize how costly small mistakes can be—whether it’s forgetting to protect their brand or skipping important paperwork. According to the Small Business Administration (SBA), nearly 36% of small businesses deal with legal problems every year, including contract issues, tax errors, and licensing troubles.

The good news? With a little planning and the right knowledge, you can avoid these problems. Here are the top legal mistakes new entrepreneurs make and easy steps to stay out of trouble.

1. Picking the Wrong Business Type

The Mistake: Many entrepreneurs don’t think carefully about the type of business they set up. This can mean paying extra taxes or even risking personal savings if the business gets into debt.

Example:
Sarah started a small baking business as a sole proprietorship (where there’s no separation between her and her business). When someone sued her over an allergic reaction, her personal savings were at risk because her business wasn’t legally separate from her.

How to Avoid It:

• Learn About Business Types: Research options like sole proprietorships, LLCs (Limited Liability Companies), or corporations.
• Get Help: Talk to a lawyer or accountant to figure out what’s best for your business.
• Start Simple: Many small businesses begin as LLCs because they’re flexible and protect personal assets.

2. Not Using Proper Contracts

The Mistake: Relying on handshake deals or vague agreements can lead to misunderstandings and lawsuits.

Example:
Mark hired a friend to help design his website. They agreed verbally on payment, but when Mark wasn’t happy with the work, he had no written contract to settle the disagreement. It hurt their friendship and wasted time.

How to Avoid It:

• Always Write it Down: Have a written agreement for any deal—whether it’s with customers, suppliers, or freelancers.
• Be Clear: Include the scope of work, deadlines, payments, and what happens if something goes wrong.
• Use Templates: You can find free contract templates online or ask a lawyer to create one you can reuse.

3. Forgetting to Protect Your Brand

The Mistake: Many entrepreneurs skip registering their business name, logo, or tagline. This leaves them unprotected if someone copies their brand.

Example:
Jessica started selling handmade jewelry with a unique logo but didn’t trademark it. A year later, another business started using the same logo, and she couldn’t stop them because she didn’t own the rights.

How to Avoid It:

• Register Your Trademark: Protect your business name, logo, and tagline by registering them with your country’s trademark office.
• Use Copyrights: If you create original content (like designs, blogs, or software), secure it with copyrights.
• Check First: Before choosing a business name or logo, make sure no one else is already using it.

4. Skipping Licenses and Permits

The Mistake: Some businesses start operating without the proper licenses or permits, which can result in fines or being shut down.

Example:
Daniel started a food truck without getting a health department permit. Local authorities fined him and forced him to stop selling until he got the proper paperwork.

How to Avoid It:

• Do Your Homework: Check what licenses or permits you need for your business type and location.
• Renew on Time: Many permits need to be renewed yearly—don’t let them expire.
• Ask for Help: Local small business organizations can guide you on what’s required.

5. Misclassifying Workers

The Mistake: Entrepreneurs often confuse employees with freelancers (independent contractors). Treating them incorrectly can lead to tax penalties and legal problems.

Example:
Amy hired a freelancer for her tech startup but treated them like an employee, setting fixed hours and tasks. When the freelancer filed a complaint, Amy faced penalties for not offering benefits or withholding taxes.

How to Avoid It:

• Understand the Difference:
  • Freelancers: Work independently and control how they get the job done.
  • Employees: Follow your schedule and use your tools.
• Use Proper Agreements: Clearly define the relationship in a written contract.
• Follow Tax Rules: Check IRS or local guidelines to avoid fines.

6. Not Getting Insurance

The Mistake: Skipping insurance to save money can backfire if an accident happens, leaving you with big bills.

Example:
Emily didn’t have liability insurance for her boutique. When a customer slipped and got injured, she had to pay medical bills and legal fees out of pocket.

How to Avoid It:

• Start with Basics: General liability insurance protects you from accidents or lawsuits.
• Add What You Need: Depending on your business, you might need product liability, cyber insurance, or workers’ compensation.
• Shop Around: Compare quotes from different providers to get the best deal.

7. Ignoring Data Privacy Rules

The Mistake: Collecting customer data (like emails or credit card info) without proper security measures can lead to fines or loss of trust.

Example:
A small online store collected customer data for email promotions but didn’t secure it properly. After a hack exposed their customers’ information, they were fined under Europe’s GDPR rules.

How to Avoid It:

• Secure Customer Data: Use encrypted payment systems and secure storage for sensitive information.
• Follow Privacy Laws: Know your country’s laws, like GDPR (Europe) or CCPA (California).
• Have a Privacy Policy: Explain how you use and protect customer data in clear terms.

8. Mixing Personal and Business Finances

The Mistake: Using the same bank account for personal and business expenses can lead to messy accounting and tax issues.

Example:
John ran his freelance writing business through his personal bank account. When tax season came, he struggled to separate his personal expenses from business ones, risking penalties from the IRS.

How to Avoid It:

• Open a Business Bank Account: Keep all business income and expenses separate.
• Use Accounting Software: Tools like QuickBooks or Wave make tracking finances easy.
• Set a Budget: Avoid using personal funds for business unless documented.

Final Tips

• Get Help Early: Hiring a lawyer or accountant might seem expensive, but it can save you money and stress in the long run.
• Keep Records: Document everything—contracts, permits, expenses, and correspondence.
• Stay Educated: Laws change, so make it a habit to review your business’s legal needs regularly.

Starting a business is a learning process, but avoiding these common mistakes will put you on the path to success. Build your business with a strong legal foundation, and you’ll save time, money, and headaches in the future.