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Common (mostly legal) mistakes startups and new businesses make

🕐 3 min read

Entrepreneurs, usually long on enthusiasm but short on funding, often resort to self-help. This approach can force helpful ground-up learning. But not everything is as simple as it seems, especially in legal matters. Common mistakes can have adverse, and possibly devastating, effects on entrepreneurs and their businesses. They include:

• Not adequately researching the business’ name. Rebranding is expensive. So is trademark infringement. Forming a business is no guarantee that your business name is not infringing on another’s intellectual property rights. Before spending any money on marketing, make sure that the registering agency accepts your proposed name and check to make sure no competitive entity is using the same or similar name.

• Incorrect/incomplete business formation. Registration is deceptively simple – there are pitfalls to trip up the unwary. Founders forming their own business often believe their entity provides them personal liability protection, only to learn too late that that is not the case. Forgetting to complete all necessary state and local registration, failing to execute appropriate governing documents, and neglecting to keep the entity completely separate from its individual owners are other common mistakes.

• Inadvertently assuming personal or unnecessary liability. Once assumed, a liability is not easily shed. Signing any contract or making any commitment before the entity is legally formed results in personal liability for the signatory. Additionally, ensure that the entity, and not the individual owner, is party to any contract, and avoid signing as a surety. Include adequate disclaimers, carefully craft sales/service contracts and warranties, and consider the interstate effects of online activity to prevent unnecessary, avoidable liability.

• Not formalizing arrangements or deals. Failure to clearly define the terms of agreements with suppliers, independent contractors and clients can result in misunderstandings and lead to expensive litigation. To be safe, formally document all agreements, particularly mission-critical arrangements.

• Signing contracts without negotiating them or without understanding the terms. Often, new business owners sign whatever contract is put in front of them. Never sign any contract without reading and understanding it and at least trying to negotiate more favorable terms.

• Failing to file required franchise tax forms. Texas imposes a franchise tax on each taxable entity chartered/organized or doing business in Texas. The annual franchise tax return must be filed even if no taxes are owed. Failure to file may result in the termination of the business’ registration and the loss of any liability protection associated with it.

• Lack of awareness of applicable laws, regulations and rules. There are an ever-increasing number of laws, rules, regulations and the like that businesses must abide by. And any business with an online presence must be aware of the various disclaimer, regulation and privacy laws across the nation. Do thorough research.

• Failure to keep up with administrative or organizational needs of the business. Entrepreneurs and small-business owners, always pressed for time, often operate in a perpetual state of crisis. There is always another task to complete, order to fill, project to perform or person to meet. Unfortunately, management-by-crisis leads to neglecting bookkeeping, accounts payable, employee matters, financial reporting and the corporate formalities. Chaos breeds demand letters and lawsuits.

Taking the time to investigate and consider the items listed above will help entrepreneurs avoid some of the common issues that lead to legal headaches.

Constance K. Hall, an Arlington-based attorney, focuses her practice on helping entrepreneurs, small-business owners and social innovators.

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