7 Rookie Legal Mistakes Entrepreneurs Make (And How to Avoid Them)

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Rachel

On this Cyber Monday, I wanted to share an important article from my dear friend and trusted IP lawyer Rachel Rodgers. Having been in business for 18 years, and worked with hundreds of entrepreneurs, I have either lived through or seen just about every mistake you can make in business. The legal mistakes can be especially egregious, and costly.

I want to emphatically recommend that you follow Rachel’s advice. It will not only protect you from risk, it will make your business much stronger and more enduring.

Enjoy her advice, and cover your assets! 🙂

-Pam

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“Your body of work is everything you create, contribute, affect and impact. For individuals, its the personal legacy you leave at the end of your life, including all the tangible and intangible things you have created … For organizations, it is the products, property, inventions, ideas, and value they share throughout the course of their existence.”
— Pamela Slim, Body of Work

On your journey to create your body of work, there are a variety of productive questions you might ask yourself to determine exactly what your business will look like. You might say to yourself, “who do I want to help?” and “what drives me?” and “what do I want to create?”

Unfortunately, when creating something of value to contribute to the world you’re also forced to ask yourself a few less exciting questions, such as “should I trademark this?” and “I wonder if I could pay less taxes as an S-Corp? and “should I get this in writing?”

Creating a proper legal foundation for your body of work may not fill you with delight, but it’s what smart entrepreneurs, side hustlers and makers do to ensure they don’t have to worry about making legal mistakes that could derail their plans.

While most entrepreneurs know this, they still tend to avoid the legal stuff like the plague. Here are some of the reasons that you’ve been procrastinating when it comes to handling the legal aspects of your business:

  • Because it’s stressful and confusing and you’d rather pretend you didn’t have to,
  • Because you think everyone is ‘nice’ and therefore you don’t need to have contracts, register your intellectual property or form a proper business entity,
  • Because you’re scared to find out that you’ve been doing it wrong all this time,
  • Because you figure you can’t afford to get legal help so you might as well ignore it until you can,
  • Because you think your business is too small for anyone to steal from you, sue you or otherwise screw you over.

I know the legal stuff seems scary and hard, and you know what, it kinda is. But so is becoming an entrepreneur and you’ve taken that leap and lived to tell the tale. So you can do this too. Plus, there’s something out there that’s much harder than the legal stuff and that’s never building the kind of business/art/app you’re dreaming of because you didn’t want to deal with the hard stuff. So with that in mind, I present to you the 7 Rookie Rookie Legal Mistakes Entrepreneurs Make (and How to Avoid Them).

Mistake #1: Not vetting the name of your business/product/service before you begin using it.

By vetting I mean conducting a thorough trademark search before you invest large sums of money in the name of your business, product or thingamabob. It would be devastating to invest thousands of dollars in building your brand around a mark only to later find that the mark is infringing on someone else’s trademark rights and therefore, you have to change the name, lose your place in Google search results, rebuild your website and destroy your products and marketing materials bearing the mark.

Here’s how to avoid it: Be sure to conduct a thorough trademark search before you commit to a new brand name for your business or one of your products.

Mistake #2: Not separating your business and personal finances.

From an accounting perspective, this is a major no-no for managing business finances (how will you know how much profit you’re generating if you’re mixing and mingling your personal funds with your business funds?). As a business owner, it is really hard to make smart decisions for your company without clear financial data. But from a legal perspective, commingling funds between a personal account and a business account has an even worse result — commingling is a surefire way to lose the liability protection from any business entity you have created.

Here’s how to avoid it: Set up financial accounts solely for business income and expenses — that means business bank accounts, business PayPal accounts and business credit cards. No accounts should be shared between your business and personal finances.

Mistake #3: Not maintaining annual corporate records.

Piercing the corporate veil is when courts find that a business entity and its owner are not actually two separate entities but one in the same because of the way the business is managed. Piercing the corporate veil means that business creditors can come after your personal assets, including your home, your car, you inheritance, your retirement accounts, your future wages if you currently have a job or if you decide to get a job in the future. The way to avoid this is by updating your corporate records annually by drafting your annual minutes and submitting your corporate filings with the state your company is registered in every year.

Here’s how to avoid it: Record everything that happens in your business on an annual basis and take care of your annual state filings each year. Have a corporate file with all of your insurance, contracts, leases and other legal documents.

Mistake #4: Not reducing your business relationships to writing.

Doing business without a contract is a really bad idea because the whole purpose of a contract is to prevent lawsuits by making sure that your and your clients, contractors and business partners are on the same page about the terms of your arrangement. Think of it as a way to take care of yourself and the people you work with.

Here’s how to avoid it: Have proper contracts in place between your business and all of your clients, contractors and business partners with terms covering what exactly being exchanged, who owns the resulting intellectual property, cancellation clauses, payment terms and all that beautiful boilerplate that is sure to save your ass one day.

Mistake #5: Not having legal notices on your website.

For many of us entrepreneurs, our websites are our storefronts. If you collect information from those who visit your website, you need a privacy policy. You should also have terms and conditions on your website to govern your relationship with your website visitors, subscribers and clients, particularly if you sell products or services from your site. Lastly, disclaimers are a way to notify people of how to use the information on your website and put limitations on the inherent promises, advice, and guarantees that may be expressed in some of your website’s content.

Here’s how to avoid it: Post a privacy policy, terms and conditions and appropriate disclaimers on all of your websites including your blog, landing pages and sales pages.

Mistake #6: Not protecting your valuable intellectual property.

Intellectual property is “creations of the mind — inventions, literary and artistic works, symbols, names and designs — used in commerce.” The longer you are in business the more intellectual property your business produces and the greater the value of that property. Things like logos, slogans, apps, e-books, classes, written works and visual designs are some of your businesses money makers and identifiers of your brand. It’s important to take steps to protect those company assets.

Here’s how to avoid it: Register your intellectual property with the U.S. Patent and Trademark Office and the U.S. Copyright Office so that no one else can cut you out of the profits for your hard work.

Mistake #7: Classifying all your team members as contractors instead of employees.

This is one of those pieces of advice that business owners are really disappointed to hear. Unfortunately, the IRS has very strong bias towards workers being classified as employees rather than contractors (blame it on the substantial revenue the IRS enjoys from employment taxes). The IRS uses three categories, behavioral control, financial control and the nature of the relationship between the parties, to determine whether a worker is a contractor or an employee. When you do this analysis, you’ll likely find that your VA? Is probably an employee.

Here’s how to avoid it: Do a proper analysis to determine whether your workers are independent contractors or employees. And be sure to have all independent contractors sign an independent contractor agreement. Pro tip: If you have employees on your hands, Zen Payroll is your best friend.

Don’t sell yourself or your business short. Once you are generating revenue as an entrepreneur, supporting yourself, your family and your community at large, you and your business deserve to be protected. Don’t risk losing all or even some of your hard work, creativity and money. Your business deserves better than that.

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5 Responses to “7 Rookie Legal Mistakes Entrepreneurs Make (And How to Avoid Them)”

  1. Pamela,

    I just want to said thank you for this great tips. Is my first visit to your blog and is Amazing.

    Good Job!

    Marvin Gandis
    Las Vegas,NV

  2. Excellent post–I do have a question though: would any of the advice given change if you were talking about a solopreneur venture? Curious … again thanks for the insightful article.

  3. Matt Fenwick says:

    Agree, especially #4. I’ve heard several colleagues say that they work on trust, which works really well until it doesn’t. I think sometimes we’re anxious about wanting to even suggest that things might go bad. How I get around that is by just saying ‘I take the same approach for everybody’, so it’s more about managing risk than pointing the finger.

  4. faisal says:

    Super post with some very awesome points.

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