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Small Business Legal Planning: Ten Biggest Mistakes

Small business owners and managers often fail to adequately address legal issues. This failure can stem from being busy with other matters, unawareness or insensitivity to legal concerns, or reluctance to spend the money to hire an attorney. Unfortunately, such businesses can end up incurring substantial expenses or liabilities that could have been avoided with good legal planning.

The following are ten key legal mistakes that are frequently made by small businesses:

1. Lack of preparation of corporate minutes.

To preserve the shield that protects shareholders from personal liability for corporate debts, a corporation must observe formalities such as preparing regular minutes of the Board of Directors and shareholders. Lack of records can also jeopardize the validity of various corporate tax deductions, particularly in the areas of officer compensation and benefits.

two. Not updating invoice and purchase order forms.

The lack of adequate legal provisions in these forms could place the company in a weak legal position in the event of a payment or other dispute with a customer.

3. Lack of Confidentiality Agreements with Employees and Contractors.

Much of the value of many startups lies in their intellectual property. Strong confidentiality agreements are essential to protect that property.

Four. Lack of Current Purchase-Sales Agreement.

Almost any business with more than one owner must have a purchase-sale agreement. A buy-sell agreement defines what happens upon the death, retirement, or termination of employment of one of the owners, or when an owner wants to sell his or her interest in the business. The absence of a buy-sell agreement can have unintended consequences or a legal quagmire in such circumstances.

5. Lack of updated Employee Manual.

An employee handbook establishes the rules and policies of the workplace and the procedures related to the employment relationship. The lack of a satisfactory manual increases the risk of misunderstandings or legal violations, which can result in costly employee disputes, lawsuits, and government sanctions. Also, a manual must be updated frequently to deal with changes in the law.

6. Lack of Documentation of Transactions between the Corporation and the Owners.

Stockholders often enter into transactions with their corporations, such as leases of real or personal property or loans to or from the corporation. Failure to document these transactions satisfactorily (as well as negligence in preparing regular minutes) can weaken the corporate liability shield or have adverse tax consequences.

7. Failure to Update Corporate Articles and Statutes.

The articles and statutes must be reviewed and modified from time to time to take into account legal changes. Otherwise, the corporation could find itself in violation of corporate laws or subject to cumbersome and outdated corporate procedures.

8. Lack of stock options or other stock plans.

The absence of well-designed equity incentive plans can make it difficult for a company to attract, motivate and retain employees. A poorly written plan could also result in unexpected liabilities or expenses for the corporation.

9. Improper Estate Planning.

With a closely held business, estate planning by the owners must be done in conjunction with overall business planning. Lack of proper estate planning documents can result in costly probate proceedings or unnecessary estate taxes.

10 Failure to comply with legal review of the website.

Depending on the nature of its business, a business must include appropriate terms and conditions, copyright notices, legal disclaimers, and a privacy policy on its website.

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