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10 Common Legal Mistakes Small Business Owners And Entrepreneurs Make

Common Legal mistakes

Small business owners are vulnerable to common legal mistakes at the early stage of the business. These common legal mistakes arise from the fact that most entrepreneurs ignore or place little or no importance on the legal aspect of the business. This attitude can be attributed to the need to cut down business expenses and the misconception that legal matters attract huge costs.

Thus, making small business owners vulnerable to common legal mistakes that can be avoided. These mistakes can slow and hinder the growth and development of the business. Also, these mistakes can put the business at risk of failure.

See Also: Legal requirements for entrepreneurs when starting a business.

Start Your Business in 30 Days Even If You Don't Have An Idea
Start Your Business in 30 Days Even If You Don’t Have An Idea

Common Legal Mistakes That Small Business Owners Make

Here are some of the common legal mistakes that small business owners make;

Failure To Use A Lawyer

The focus of most early-stage small business owners is the creation of awareness for products and building clientele. Thus, little attention is paid to the legal matters affecting the business. They tend to diminish the importance of the services of a lawyer at the early stage of business development.

Most often, this attitude can be attributed to ignorance and a ploy to reduce working capital costs. Thus, allocating little resources to legal advisory and relying on self-help legal products found on the internet. This approach may be useful in the short run, but difficulties are bound to arise in a long run. This is because self-help legal products address common legal issues while ignoring intricate issues that are peculiar (distinctive) to the business.

Employing the services of a lawyer aids to identify legal issues that are common and peculiar to the business. The legal advisory can help position the business to take advantage of opportunities that may enhance growth in the long run. It also eliminates any future risk which may threaten the life span of the business.

However, in employing the services of a lawyer, small business owners should seek legal advice from lawyers who have expertise in business growth and development. Lawyers who have no expertise in business advisory will fail to recognize the vital issues that are important to the business.

See Also: Top legal documents every entrepreneur and start-up should have.  

Failure To Set Up The Right Business Structure

This legal mistake is a fairly common occurrence. Small business owners often fail to set up the right business structure or not set up any business structure at all. The right business structure often helps to promote the goals of the business and cater to the needs of the business.

The right business structure also helps for effective organization and management structure. Additionally, the right business structure can help the business take advantage of the incentives put in place by legislation to support business growth. Failure to set up the right business structure can hinder growth and expose the small business owners to personal liability of the business.

Further, legal problems such as tax liability may arise due to failure to set up the appropriate business structure. There are several business structures recognized and protected under the Companies and Allied Matters Act. Small business owners in commencing a business can adopt any business structure which adequately caters to their business needs.

Failure To Register Early

This is another common legal mistake. Entrepreneurs often underestimate the need to register the business entity early. Business entities are capable of owning properties, entering into legal agreements, and having debts obligations. Thus, there is a need to separate the identity of the business entity from the business owners. This is achieved by registering the business structure under the law. Hence, separating the business liability from that of the small business owner.

See Also: Business consulting business idea to start now and make money.

Failure To Follow Business Regulatory Legislations

This mistake is a fairly common legal mistake due to the ignorance of business legislation. In setting up a business, familiarity with business legislation is expected of the business owner. Failure to follow business regulatory obligations can lead to the closure of the business by regulatory authorities. It can also incur punitive costs to the business imposed by the regulatory authority. Thus, leading to extra unforeseen costs to the business.

Go from idea to starting your business in 30 days
Go from idea to starting your business in 30 days

However, it should be noted that the excuse of ignorance of business legislations is no longer acceptable by regulatory authorities when in default. Hence, in setting up a business, small business owners should familiarize themselves with business legislation.  

Uncertain Terms Of Service

This legal mistake often occurs at the early stage of the business. Terms of service are the obligations the business owes a customer in rendering a service. Terms of service are usually employed in daily interactions with customers. Uncertain terms of service often occur in a business at the early stage, as the business is still familiarizing itself with the business environment.

Therefore, in order to build customers’ network, service terms are often adopted to please customers’ preferences, hence developing uncertain terms of service. This can create legal uncertainty and unreliability in the performance of daily obligations to customers.

Obligations arising from these terms may be abandoned or left unfulfilled by the customers as they are uncertain. It can also reduce customer networks as customers may view such terms as prejudiced and unfair. As a customer may view the terms of service adopted to one customer unfairly in comparison to the terms of service given to him.

Therefore, small businesses should adopt clear and precise terms of service in service to customers.

See Also: How to choose the right supplier for your business.  

Improper Or Unwise Issuance of Equity

This legal mistake is common among business entities operating as a company and at the early stage of growth. In the formation of a company, equity created is often used as compensation to the founders, investors, and early-stage employees. However, companies make the mistake of failing to vest equity before issuance as compensatory benefits.

Vesting of equity means the issuance of equity to a founder or investor or employee, but the rights to such equity are given over a period of time. Vesting is used as a form of incentive to ensure commitment to the company. It gives the prospective equity holder an opportunity to create value for the equity.

Unwise issuance of equity without vesting gives room for founders, employees, and investors to pull out of the company without creating value for the equity. Thus, diminishing the value of equity and the company’s value. Therefore, hindering the company’s growth and risking business failure.

Companies, especially startups are advised to have a vesting clause or agreement when issuing equity to founders, employees, and investors.

See Also: How to turn a business failure into success.       

Failure To Obtain Non-Disclosure Agreements

A Non-Disclosure Agreement is a legal document that is important to a business. A non-disclosure agreement forbids employees or persons that have sensitive information about the business from disclosing such information to third parties. This agreement is important as it helps to protect business trade secrets.

Disclosure may give competitors an economic advantage that may put the business out of the market. Small business owners fail to obtain non-disclosure agreements because they fail to identify trade secrets that contribute to business growth. Hence, small business owners are advised to identify and protect trade secrets which contribute to the growth of the business. 

Failure To Identify Intellectual Property And Protect It

This is another fairly common legal mistake. Identification and protection of business intellectual property may be a huge expense at the early stage of the business. Yet, ignoring or postponing its identification and protection can cost the business greatly.

Intellectual property gives the business its identity and branding distinct from its competitors. This identity and branding can be easily lost to competitors if not protected. Therefore, businesses should at the early stage develop a strategy for its identification and protection.

See Also: How to successfully implement a business idea.

Failure To Have A Privacy Policy

This legal mistake is quite uncommon but has been popularized by data-protection laws and regulations. This mistake occurs when sensitive information obtained by the business about its customers is disclosed to third parties without consent. It is often prevalent in businesses that use financial technology to conduct business, thus, obtaining sensitive information (such as credit card details, bank account information, residential address, email address, etc.) of customers. 

Hence, laws and policies have made it mandatory for businesses to have a privacy policy. A privacy policy forbids business owners from disclosing sensitive information about customers to third parties without consent. The failure to have a privacy policy can have costly legal and regulatory consequences in event of a data breach.

See Also: Want to start a business but don’t know the business to start? Get 35 Booming Business Ideas and Step-by-step Guides to Start them; a strategic and financial breakdown of the most lucrative businesses in Nigeria. 

Lack Of Proper Written Agreements

This is another common legal mistake. Small business owners often fail to document written agreements between third parties. They often enter into informal agreements that are uncertain and unreliable. This uncertainty and unreliability make them unenforceable in law and risky to the business.

Huge working capital and revenue risk loss due to these informal agreements. Hence, entrepreneurs should put into documentation every agreement entered into. Written agreements are reliable and enforceable when there is a default in terms.

These common legal mistakes stated above should be avoided by the small business owners at all costs. As they can have severe consequences on the business which may hinder growth and risk business failure.  

As an entrepreneur, have you been a victim because you didn’t have the right legal knowledge? Please share your experience with us in the comments. We will like to learn from you.

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