Starting a new business is tough. The Small Business Administration estimates that half of all new businesses fail within the first five years after their creation, and only about one third survive 10 years or more. In addition to the economic and operational risks that every business faces, there are a number of legal and general mistakes made by small businesses which can and do have significant effects on their success or failure.
Failure to adopt a well-thought-out business plan
Most businesses start because the founder perceives there is a need in the marketplace that isn’t being met or can be met more cheaply. Where businesses fail is by not determining the market for their product or service, the costs and profitability potential, and whether the business will generate sufficient cash flow or will need capital from outside the company. Any business endeavour needs to have a well thought out plan.
Failure to address employment issues
Hiring the right employees is crucial in a small business, where a bad hire can have huge business implications. But in addition to finding the right people for the job, small businesses need to be aware of the legal relationship between the business and the employees, compliance with various regulations, and the impact and enforceability of employment agreements and restrictive covenants.
Failure to do a buy/sell agreement
Any small business that has more than one owner needs to have an agreement that covers items such as governance and management, profit -sharing, the addition of new owners, and solving disagreements. It is more likely than not the ownership group of the business will expand or change, and, much like a will that provides for an orderly disposition of assets upon death, having a well-considered agreement among the owners can head off or limit disputes down the road and promote harmony among the owners.
Failure to protect intellectual property and trade secrets
Intellectual Property (IP) is the most valuable asset of a startup. Patents, trademarks, and copyrights are the three essential components of intellectual property. It is crucial to not let anyone claim a right to your IP. Strict non-disclosure agreements are a way of ensuring this. Startups often neglect the protection of intellectual property and suffer later.
Many entrepreneurs lump all types of intellectual property together, but it is important to distinguish the different types and determine how best to protect each type early in the operation of the business. Patents protect ideas or concepts which are novel and non-obvious. In order to claim patent protection, you must obtain a patent and, importantly, must file the application for the patent no later than one year after the idea is published, used in public, or offered for sale.
Trademarks protect words, designs or phrases which serve as the “brand” for a product or service. Trademarks are automatically protected under state and federal law simply by using them, although registration provides additional benefits.
Copyrights protect creative expressions fixed in a tangible medium, such as prose, music, and video. Like trademarks, copyright law protects works automatically and registration is not required, but copyright registration can provide significant benefits as well.
Lastly, trade secret law protects commercial information which is not disclosed to the public (a good example is the Coca-Cola formula). In order to maintain trade secret protection, the business must maintain the secrecy of the information by not widely disseminating the information and requiring those with access to the information to agree not to disclose information.
Failure to avoid costly litigation
Litigation should generally be considered as a last resort. It is expensive and a drain on the time and efforts of any involved employees. Before getting involved in litigation, any small business should try to temper the emotions that are caused by a dispute and consider the costs and benefits of the litigation, just like they would any other business decision, and determine any collateral effects of the litigation as well.
Failure to hire legal services
In the rush to start up their business, entrepreneurs mostly focus on everything except the legal considerations of operating their business. This point may seem self-serving, but working with a lawyer on legal issues is at least as important as working with an accountant on financial issues. Experienced counsel can help a small business spot and avoid legal issues before they become destructive to the company.
Not tracking expenses
Another common mistake commonly made by the startups is not keeping track of their expenses, small or large, throughout the year. Many businesses try to collect all receipts only when tax returns must be filed! What is not documented is not deduced, hence, it’s like leaving money in the open. There are many options available to manage and record expenses. Entities can also hire accountants in order to manage these records.
Lack of documentation
Each interaction, whether minutes of meeting or anything else, must be on record. It is crucial to have all documents in proper order at all times. Legal due diligence can make or break a crucial deal of business.
Don’t have proper agreement of the founders
It is important to have a solid founder’s agreement because it is worth thinking about how you and your co-founders could face failure. The agreement of founders must contain all the essential clauses, such as adjudication rights, property, and the functions and responsibilities of each founder, including conditions of employment and wages.
Mixing revenue and capital expenses
One of the main confusions for those who present business for the first time is about expenses. What expenses are considered capital/assets expenditures and what are called deductible income expenses in the P&L A / c. The most valuable items that will last significantly more than a year are known as capital/asset/equipment expenses. Therefore, be careful when you are accounting for all those expenses.