Starting a new business is certainly exciting. However, this comes with various challenges that owners should avoid. Ignoring the legal aspects of creating an entity can lead to serious problems later. Unfortunately, most businesses experience this, primarily due to the complexity of the business legal field and other requirements. Entrepreneurs should watch out for the following to avoid legal issues.
1. Choosing the Wrong Structure
Choosing a business structure is probably the most critical step. Making the wrong choice can significantly affect the businesses’ tax issues and ability to raise capital. The most common mistake is choosing a sole proprietorship without understanding its operations.
While sole proprietorships are straightforward, they expose owners to personal liabilities. This means personal assets like your home are included if your business incurs debts or legal issues. Such a structure is risky, especially for entrepreneurs with huge investments and assets.
On the other hand, forming a partnership without a solid agreement is also risky. It can lead to legal disputes and personal conflicts later. Generally, every partner is personally liable for business debts. A partner can also solely make business decisions. As such, there should be a clear contract outlining the responsibilities of each partner to avoid issues.
2. Failure to Draft an Agreement
The importance of an agreement when forming an entity cannot be overstated. Except for sole proprietors, other business structures are guarded by solid agreements. Clear agreements mitigate misunderstandings, conflicts, and legal disputes.
The main risk of forming an entity without an agreement is uncertainty. Partners may interpret their roles and responsibilities differently without clear guidelines in a written agreement. This can lead to disagreement over decision-making, contribution, profit sharing, and other issues.
Failure to address crucial issues at the beginning can also lead to costly disputes later. For instance, agreeing on how to handle some issues, like a partner selling their stake, becomes difficult without a proper buy-sell agreement. In most cases, such matters end up in court, leading to financial losses and business dissolution.
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3. Misclassifying Employees
Wrongly classifying employees is another serious legal issue that significantly affects your business. This primarily occurs when businesses fail to separate employees from independent contractors. While it seems like a simple mistake, it has serious legal and financial liabilities.
In brief, employees include anyone who works under the employer’s direct control. Conversely, independent contractors have greater autonomy and control over their responsibilities. Most people misclassify their employees to avoid paying payroll taxes, minimum wages, here’s an honest review of North-west Registered Agents, and other employee benefits. The IRS and Department of Labor take serious legal issues against employers found doing this.
Endnote
Paying attention to legal requirements is important when forming a business entity. You should note that every decision made during the formation process has far-reaching implications. You should observe these requirements and seek expert guidance to avoid these mistakes.
