7 Tips to Help Entrepreneurs Avoid Common Legal Missteps

Starting a new business can be one of the most exciting events on your entrepreneurial journey. After all, you're taking an idea you're passionate about and pushing it forward by metaphorically hanging out your shingle so you can share it with the world — and hopefully, lots of potential customers and clients.

One not-so-exciting aspect of the startup process is tending to all the necessary legal matters. To help you build a solid foundation for running your new business, here are seven tips to help you avoid common missteps as you begin your entrepreneurial journey.

1. Choose Your Business Structure

Take time to look at the various business structures available to your fledgling business. You might be “small potatoes" now (and, really, starting out small is a rite of passage for many businesses) but chances are you're envisioning growth at some point. If that's the case, there's no better time to consider the right business structure for your new business than at startup.

Whether you decide you'll stay on your own as a sole proprietor, pair up with someone in a partnership, or opt for forming an LLC or a corporation, the business structure you select comes with a list of to-dos that will go a long way toward securing the legal foundation for building and growing your business. 

Once you know the best structure for the business, you’ll also know if you need a physical office or a virtual one. Usually, small businesses don’t need the added cost of an office space, but it helps your image if the business is located in a central area of the city. 

As such, you can create a virtual address for your office, and enjoy all the benefits without the hyper-inflated costs. An office in a fancy building looks good on your site, impresses possible partners and customers, and offers you the perfect space for business meetings, exactly when you need it.

2. Draft an Operating Agreement

Unless you've opted to be a “solopreneur," one of the top items on your to-do list after choosing your structure should be your business's operating agreement.

The term for this document varies depending on your choice of structure. If you're forming an LLC, for example, you'll be drafting an operating agreement. For corporations, corporate bylaws are the term more commonly used. And if you're partnering with one or more individuals or companies, you'll want to have a partnership agreement. Each of these documents has the following in common: They establish rules and guidelines, and can smooth out operating conflicts that might arise down the road.

3. Obtain Permits and Licenses

One benefit of starting your business on a small scale is a scaled-down set of costs as well. But don't be tempted to start so small that you neglect investing time and money into researching and obtaining all the permits and licenses required for your business.

Be prepared: The list might be longer than you think. From applying for an EIN number to checking into zoning permits to obtaining a sales tax license, set aside time to determine the essential permits and licenses you'll need. But the good news? Once you have everything you need, you can rest easy knowing you've crossed all those legal t's and dotted all those red-tape i's.

4. Be Prepared When Hiring Help

That moment when you realize you need to hire help and you can afford to? Pure heaven for any entrepreneur! But whether you're putting on your employer hat or scouting for more specialized, short-term expertise in the form of an independent contractor, be prepared with all the documentation you'll need to welcome help into your business.

Start with an employment agreement or independent contractor agreement, but the documents shouldn't stop there. For example, if you're taking on a new employee, you'll need to complete tax forms, and both employees and independent contractors should be given copies of any relevant company policies or operating procedures. The beauty of this level of preparedness? You'll reduce the potential for conflicts that might arise if your new hire or contractor misunderstands the terms and conditions of their position.

5. Keep Your Trade Secrets Secret

You might think your business doesn't have any trade secrets, but that term covers anything you want to keep confidential.

Whether it's an email list of prospects, details of your business process laid out in your business plan or the deal you've arranged with an important vendor, it's important to protect your confidential information with a nondisclosure agreement (NDA). And remember, it's not just staff and independent contractors who should sign NDAs. Anyone who might end up getting a peek at the stuff you want to keep secret should sign one, too. That might even mean the cleaning team that comes once a week to keep your offices sparkling!

6. Don't Count on Just a Handshake

No matter who you're interacting with, relying on the “handshake deal" can often blossom into a huge mistake. This business wisdom applies to even small business transactions. You may think both parties are on the same page, but the reality is, unless words are also on that page, misunderstandings can occur.

What's the best way to be prepared, then? Put together a general agreement template. You'll find yourself turning to this document again and again, customizing it as needed to reflect the specifics of any particular transaction. And in the process, you'll be protecting your business and the other party as well.

7. Protect Your Intellectual Property

Whether it's a business logo, brand name, specific designs or written copy, chances are your business owns intellectual property in some shape or form. And the time to apply for that copyright, trademark or patent is right now, before you have to enforce your rights.

Sure, you can wait until your intellectual property rights have been infringed, but that's a dangerous and potentially costly approach to take from a risk management perspective. Save yourself headaches down the road: Protect yourself by properly registering your intellectual property rights now.

While at first glance these legal to-dos might seem daunting, checking off the items on this list is a necessary and important step for setting up your business. It might seem like you're spending a lot of time and money but, in reality, the costs of not taking these steps now could be much larger later.

About Erika Rykun

Erika is an independent copywriter and content creator. She is an avid reader who appreciates unread books more than read ones.