Top 3 Legal Issues Small Businesses Face and How to Address Them

Small business owners are at the heart of our communities. The dream of owning a business and being your own boss is both exciting and scary. The legalities of running a business regardless of size can be daunting for most business owners.
There are a few reasons I’ve found that small businesses get into trouble. They don’t know what they don’t know, and they tend to weigh the cost verses seeking legal counsel. The following three legal issues rank among the top three small businesses face and why they need to be addressed.

1. Business Structure

Choosing the right business structure is crucial for any small business. The formation of your business dictates what you will need to comply with and affects your taxes and personal liability. A business may decide to operate as a Sole Proprietorship, Partnership, Limited Liability Company (LLC), or Corporation.

  • A sole proprietorship is a single person business that is not registered with the state or any government entity.
  • A partnership is a company owned by two or more people who share profits and losses.
  • An LLC separates personal and business finances, protecting personal assets from business debts.
  • A corporation provides conflict separation between shareholders and the company. Each business structure varies in legal compliance requirements.

Consulting a lawyer can help you decide the best legal structure according to your operations and plans for growth. Failure to address this legal issue could subject your business to liabilities, like lawsuits against personal property, making legal operation critical.

2. Intellectual Property

Small business owners create intellectual property and should protect it. Intellectual property includes anything created by the mind such as inventions, designs, logos, music, and written work. Protection of intellectual property safeguards against legal infringements, plagiarism, and unauthorized use.
Enlisting the services of an attorney or firm experienced in intellectual property law aids businesses in navigating federal and state laws related to the protection and registration of intellectual property, such as patents, trademarks or copyrights. Without their services, businesses risk facing copyright infringement, or cost corrective action.

3. Contracts

Contracts play an important role in business operations. They define every terms and condition while doing business with clients, employees, partners or vendors. Contracts also keep businesses legally compliant, making sure all aspects are sufficiently covered. Bad contracts put small businesses at risk of legal damage that could ruin their business.

Hiring an attorney to draft contract agreements and other legal documentation helps businesses understand and avoid unfavorable conditions, limit financial risks, and respond correctly to legal disputes.

In a study titled “The Legal Needs of Small Businesses.” revealed that approximately 60% of small businesses (more than 13 million) experienced significant legal events within the first two years. Surprisingly, 60% of small business owners who encountered a legal event did not hire an attorney to assist them.
On average, small business owners report spending an annual amount of $7,600 on legal expenses, with 20% of them spending $10,000 or more per year on legal fees. As such, small businesses must prioritize addressing legal issues, partnering with knowledgeable attorneys, and allocating appropriate funds for legal services to minimize expenses.
Ultimately not addressing legal issues can impact your profitability, longevity, and sustainably. Taking a proactive approach by seeking resources and help from attorneys will save you time and money in the long run, not to mention peace of mind.

Maria Galicia

LegalShield Independent Associate