With unemployment numbers continuing to rise, many people are considering starting their own small businesses in 2021 with the overwhelming goal to finally make some money and pay their bills. As such, in the process of starting a small business, entrepreneurs may try to cut costs to maximize their net profit. For example, legal services may be cut or compromised to save money. While these businesses may save a little in the beginning, we find that this tactic could prove to be very expensive down the road. With that in mind, today we'll discuss 4 of the most expensive small business mistakes to avoid in 2021.
Expensive Small Business Mistake #1: Choosing the Wrong Business Entity
Going into business is one thing, but if you haven't does the legal work of designating your business with the government, then you've missed a critical step. Furthermore, if you've made the wrong designation, you could expose yourself to personal liability for the actions of your business, resulting in negative tax consequences.
There are multiple business entities to choose from, including sole proprietorship, general partnership, LLC, corporation, and PLLC. Each designation has advantages, disadvantages, and tax consequences. A small business attorney can help you understand each designation, which one is right for your business, and guide you through the legal process to become an official business.
Expensive Small Business Mistake #2: Not Legally Documenting Agreements
Handshakes and oral agreements are an integral part of any small business. However, documenting those agreements is a crucial step to upholding those agreements and avoiding legal disputes in the future. Legal documentation can include but is not limited to strategies, agreements, and contracts. Not doing so could result in an expensive small business mistake.
Even if you're entering an agreement with a "friend," we find that as time passes, the details of how an agreement will be fulfilled without a written agreement tend to get lost and can cause disagreement or worse. As a small business owner, the documentation doesn't necessarily have to be complicated, but it should identify each party entering the contract, the respective obligations of each party, agreement on how disputes will be resolved, and determine under what circumstances that contract will be terminated.
If you need help creating or reviewing legal documentation or contracts for your firm, your small business attorney can advise.
Expensive Small Business Mistake #3: Not Abiding by Employment Laws
If you're going into business, it's important that you abide by employment laws. One common mistake we see amongst small business owners is misclassifying employees as independent contractors. By wrongfully classifying an employee as an independent contractor, you could be going against Worker's Compensation laws and not paying the appropriate taxes. Before making these employment designations, check with your small business attorney to make sure that you're following the law.
Expensive Small Business Mistake #4: Opening a Competing Business While Still Employed
It is risky enough to open a new business, especially with the current state of our union. However, it is incredibly risky to start a competing business while still employed. In fact, we highly advise against this. If you plan to open a new business that will compete with your current employer, tread lightly as you don't want to end up getting sued straight out of the gate.
As such, you should review your employment agreement. Specifically, look at any non-compete provisions. If there is a non-compete, you should review with your small business attorney to ensure that you don't violate your agreement with the start of your new business. We also recommend buying insurance to mitigate your losses in the event that your former employer still chooses to take legal action as defending a lawsuit can be quite costly.
Contact our law office at any point if you have questions regarding incorporation, partnership agreements, forming a business or other legal inquiries. Our small business lawyer in Raleigh is here to help you from the beginning stages of your new business.
