The 4 Deadly Legal Mistakes Small Business Owners Need to Avoid

Small businesses dominate the American business landscape, but those that survive several generations are relatively rare.  If you are a small business owner, you need to be sure you are not committing any of these four deadly legal mistakes:

1.  Mixing personal and business finances. 

If your small business started as a hobby or a side line but has grown to a point where it is your main source of income, you need to consider forming a legal entity for it, like a corporation or limited liability company (LLC).  Most small business owners choose an LLC for the personal liability protection it provides without the formalities of a corporation.  An LLC also makes it easier for you to transition the business to other partners or future generations and, since it is taxed as a pass-through entity, profits are not taxed separately but instead flow through to the owner.

2.  No employment agreements. 

Employment agreements should be used to spell out expectations, especially in family-owned businesses that may have been funded by one or more family members who expect reimbursement or those who expect a job at the family firm based on nothing more than familial relationship.

3.  Failure to obtain proper licenses. 

Most businesses are required to have local, state or federal licenses to operate, with fines assessed for those that fail to get these licenses.  They are generally inexpensive, but are often overlooked.  Check with your city or county offices to see if your business requires a license to operate.

4.  No succession plan. 

If your business has no formal legal entity, it will pass when you do.  Many small businesses fail to last through the first generation due to the lack of a succession plan.  Consult with an attorney about creating a succession plan for your small business so the value you have built over the years is protected after you are gone.

Disclaimer:  This article is for informational purposes only and not intended as legal advice or to create an attorney-client relationship. Every situation is unique and consultation with an attorney is required before any specific advice can be given.

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