Legal pitfalls new business owners should avoid

Entrepreneurs and small business owners may be knowledgeable in their fields, but they may know less about the legal side of setting up a business. Pitfalls like failing to research ideas for business names and products may be easy to avoid, but new owners may not be aware of them. For example, being aware of other companies’ trademarks might help avoid a lawsuit or costly name change.

It can also be important that business owners create a separate legal and financial entity. This protects the owner’s personal assets in case of a business bankruptcy or legal troubles. In addition to creating a corporation or LLC, business owners should set up a separate business bank account and avoid mixing business and personal banking. This is important whether a new small business has 10 employees or is simply one individual offering consulting or other services from their home. More than 40 percent of small businesses faced an actual or threatened lawsuit in 2011, so even business owners who think the likelihood of such a situation is small may benefit from taking such precautions.

Finally, new business owners who do have employees or who contract work out should make sure that they understand the difference between employees and independent contractors and classify each accordingly. If the relationship terminates in a way that leaves the other individual unhappy, the business owner could face a lawsuit.

A new business owner who makes a legal error as part of an honest mistake still must face the consequences, so it may be wise to consult an attorney as part of setting up a new business. Some entrepreneurs may think that they are running a business that has a low liability, but they still may run into legal problems if they have a dispute with a client over a contract or payment.

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