Top 5 Legal Mistakes Small Business Owners Make

It’s all too easy for small business owners to make legal mistakes that could be costly. Most entrepreneurs aren’t legal experts, but don’t expect a judge to be sympathetic to your ignorance. Inform yourself about these five common legal mistakes so you don’t make them yourself.

Ignorantia juris non excusat.

If you don’t speak fluent Latin, you probably don’t know what that means. But in legal circles it’s a common phrase that carries great weight for small business owners. It means, “ignorance of the law excuses no one.” In other words, just because you don’t know doesn’t mean you’re not responsible for complying.

But you have enough to learn. How can you possibly know every law that could impact your business? Before tackling “every” law, let’s look at the big legal mistakes you might make. The good news is that they’re relatively easy to address.

1. Not Registering Your Business

Do you sell goods to customers? Are you earning more than $12,000 annually? According to the State of Washington, these are reasons you would have to register your business, but this is only Washington.

Go to your state’s Secretary of State website to check the requirements, but, in general, most businesses are required to register with their state.

Don’t have any idea where to begin? The U.S. Small Business Administration has a guide to help.

2. Contractors vs. Employees

Don’t feel bad. Even some of the most seasoned business owners get this wrong. You might be tempted to only hire contractors largely because you don’t have to pay the associated costs that come with an employee.

After factoring in unemployment, Social Security, Medicare, and other expenses, you’re paying between 1.25 and 1.4 times the person’s base salary, and that’s not considering office equipment and training.

No wonder everybody loves a contractor. But here’s the important part: The IRS doesn’t allow you to decide if the person is an employee or contractor. You can’t treat them like a person on your staff but call them a contractor. Here’s what the IRS wants you to know:


  • Behavioral – If you have control over their schedule or how the worker does the job, they’re an employee.
  • Financial – If you have some control over how they’re paid, they’re likely an employee. If you simply pay them from an invoice, they’re a contractor.
  • Relationship – Do you have an ongoing relationship or offer benefits? If so, they’re likely an employee.

3. Using Online Contracts

Let’s be careful with this one. Many business owners use contracts they found online, and, for something with very little potential consequence, that might be ok. Something like giving an employee a small advance on their salary might not require an attorney, but, in most cases, paying a few bucks for generic contract is a bad idea.

The Internet makes us all feel like experts when, in fact, we’re not. If you’re not an attorney, don’t put yourself at risk by trying to act like one.

A contracts exists to formalize an agreement, but it should also close any legal loophole that would make it invalid. Only an experienced attorney can draft a contract for your situation that completely protects you.

Other reasons include:

  • Courts have overturned contracts based on one word. “Hereby assigns” verses “hereby agrees to assign” hold two very different meanings.
  • You get what you pay for. You’ve heard that cliché before, and it most certainly applies in this case. If an attorney would charge you a couple of hundred dollars but the online form costs you nothing, there must be a reason.
  • Not everything online is true.
  • You’ve never met the person who wrote the online contract. Are you going to trust them with the legal safety of your business?

SEE ALSO: How to Minimize Lawsuits and Legal Fees

4. Not Documenting Non-U.S. Workers Properly

If you have four or more employees, you can’t discriminate against noncitizens that have the legal right to work in the United States, according to the Immigration Reform and Control Act. The law does not allow you to not hire somebody because the paperwork that comes with him or her is more time-consuming.

One of those forms is the I-9 form. The I-9 form requires you to confirm that the person is allowed to work in the United States. You aren’t required to be an expert in spotting fake documents, but you have to do more than take the person at their word.

5. Not Reading a Contract

We’ve all done this, right? Somebody says, “sign here” and you sign without reading. You should never sign anything without first reading the document. Here’s what to look for when signing any document:

  • Are the names of the buyer and seller clearly stated?
  • Are the rights and duties clearly spelled out? (Somebody will deliver these goods on this date for this price.)
  • Are the remedies clear? If the contract is breached, does each party know the consequences? Does it say how disputes will be resolved?
  • How does the contract terminate?

All contracts are different, but if it’s not clear, don’t sign.

Bottom Line

When in doubt, contact an attorney. Spending a little money to legally protect yourself will cost you far less than if you find yourself in court trying to defend yourself.

Remember, just because you didn’t know doesn’t mean you’re not responsible.

Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.

SEE ALSO: How to Hire a Business Lawyer

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