Common legal pitfalls for new business owners to avoid

Common legal pitfalls for new business owners to avoid

March 12, 2024

Starting a new business can be an exciting endeavor, but it is crucial to ensure that you are setting yourself up for success – legally. Unfortunately, many new business owners make common mistakes that can land them in legal trouble down the line.

It is always easier to invest the time and resources on the front end to make sure everything is set up properly, rather than face potential fines, litigation, and a disruption of your business when an issue arises down the road.

This list is not intended to be all-encompassing; it is meant to raise awareness of the most common pitfalls that new business owners get tripped up by.

Not properly setting up your business as a separate entity
One of the most important steps in starting a new business is to choose the right business structure – whether it is a sole proprietorship, partnership, LLC, or corporation. Failing to properly set up your business as a separate entity can potentially leave you personally liable for any debts or legal claims against the business.

We work with small businesses owners to evaluate their business and their unique situation and advise them on which type of formation makes the most sense for them.

Failing to check to make sure you are not violating intellectual property laws
Before settling on a business name, it is essential to conduct a thorough search to ensure that the name is not already in use by another business. Violating intellectual property laws can result in legal action, so it is crucial to do your due diligence before finalizing your business name.

Beyond potential legal ramifications, this can be a costly financial mistake. Imagine ordering expensive signage, letterhead, business cards and all the other branded items for your new business, only to find out you cannot legally use the name.

Not having written agreements in place with any partners or investors
It is essential to have written agreements in place with any partners or investors to outline each party's rights and obligations. Failing to have these agreements in place can lead to misunderstandings, disputes, and potential legal issues in the future.

This is a very common issue, especially if two family members are starting a business together, or perhaps two longtime friends are launching a venture. During such an exciting time, no one wants to talk about what might happen if the business fails, or if the partners want different things down the road. Instead, the focus is often solely on launching the new business. Like a will, these types of agreements are not always easy to discuss, but they can be vitally important in the future.

Failing to follow any New York State labor laws for employees
As a new business owner, it is crucial to familiarize yourself with New York State labor laws to ensure that you are compliant with regulations regarding wages, hours, benefits, and working conditions, among other things. Laws and regulations at the state and federal level are always evolving, and it can be overwhelming for a new business owner. This is another example of how hiring an attorney to advise you can help ensure your business is operating within the rules of the current labor laws. Failing to follow labor laws can result in fines, penalties, and costly legal action from employees or former employees.

Failing to understand that ignorance of a law is not a defense
Although this is fifth on the list, it is far too common a mistake. A baker might be amazing at baking. They can open a fantastic bakery, but that does not mean they will be experts on the many facets of running the business. A year after opening, they receive a letter in the mail stating that they have violated a state or federal law. It was not willful misconduct; it was simply ignorance of the law. While it is understandable, it is not a legal defense. It is essential to educate yourself in the laws and regulations that apply to your business to avoid any legal issues down the line.

“I didn’t know the law,” or, “I didn’t think that applied to my business because I am so small” are not legal defenses that are going to be successful if you find yourself on the wrong side of an inquiry from a state or federal agency.

Given the large numbers of rules and regulations a business must follow, it is always advisable to employ trusted professionals including attorneys and accountants to guide you in the process.

We advise new business owners to be proactive in avoiding these, and other, common legal pitfalls to protect themselves and their businesses. By taking the time to set up your business properly on the front end, you can do your best to mitigate the risk of issues arising in the future on the back end.

Kevin R. Lelonek is an attorney with Gross Shuman P.C. He focuses his practice in the areas of business and corporate law, corporate litigation and business bankruptcy and reorganization. He can be reached via email at [email protected] or by phone at 716-854-4300 ext. 297.