How to Avoid Common Legal Woes as a First Time Entrepreneur

Guest post from freelance journalist, Jeremy Sutter, tech and business writer from Simi Valley, CA.

When starting a business, it takes a lot more than selling as many products as possible. There are legal factors to consider. For example, knowing how employment law works could save business owners thousands of dollars in fines. If the firm is a partnership or an LLC, it is essential to have a written agreement. Having some form of insurance is also necessary. Other helpful tips include employing tools that will prepare budget forecasts. Additionally, the owner should establish the right business entity to avoid legal issues.

Knowledge of Employment Law

It is advisable that new business owners become familiar with employment laws. If the proprietor is unfamiliar with the rules, there are well trained human resource personnel who can take on such tasks. If the owner is on a budget, some agencies specialize in employment legislation and human resource issues. The fee is minuscule compared to a full-time salary.

When hiring staff on a contractual basis, the employer needs to determine if the person qualifies as an employee or an independent contractor. Business owners can get penalized for misclassifying an employee as an independent contractor. According to the American Bar Association, firms that misclassify workers face a steep penalty from the IRS.

Unwritten Business Agreement with Partners

It is a wise business decision for entrepreneurs to have written agreements set up if the company is an LLC, partnership, or buy-sell agreement. The contract will make each owner’s intentions clear. It will also specify the result if one partner decides to leave the business. It does not matter if everyone gets along with each other. When things go awry, it could be costly and emotionally draining.

Thinking Insurance is Useless

It is advisable that all entrepreneurs should have business insurance. If someone gets injured while in the workplace, the employer is liable. If there is no insurance, out of pocket expenses can be costly. It is wise to get liability insurance as well as workers compensation insurance for the firm. Certain states require that a business obtain workers compensation insurance if they have five or fewer employees. A single owner with no employee is not required to have workers compensation insurance.

Analysis of Business Data

Businesses that have complex financial structure tend to rely on software efficient enough to provide the right analytical data. For example, OLAP on Hadoop has the capability to predict “what if’ scenario. It works well for budget forecasting. Before giving out hefty bonuses, employers like to know how well the company is performing. The software can generate complex reports that will determine the financial health of the organization.

Setting up Wrong Business Entity

When setting up business entities, it is crucial to know which one will serve the right purpose. Tax burden differs between each entity. The choice should suit the needs of the owner. Here is a description of common legal business entities:

  • Sole Proprietor – One person is the sole owner of this form of corporate structure. That means the owner gets all the profit and shoulder all the financial burden.
  • Partnership – Two or more people are responsible for the financial obligations of the firm. All parties share the bottom line as well.
  • C Corporation – This is a legal enterprise that is separate from its owners. The owners are the shareholders. If any of the shareholders get sued, he or she is responsible for his or her investment. The drawback of this business choice is the double taxation attached to it. The owners have to pay employers FICA as well as their own.
  • S Corporation – There is no tax levy on the Profits from this type of corporation. The owner pays the fee. Additionally, the owner has to report all profits and losses on his or her income tax return. There is still a double taxation attached to this entity just like the C Corporation.


First-time business owners could save thousands of dollars in legal fees by obtaining the necessary research information before starting a company. For example, having knowledge of employment laws could save the organization money further down the road. There is also an option to outsource such task.

A written agreement is crucial between business partners. Owners should also consider getting insurance to protect the firm’s bottom line. Budget forecasting is necessary for any major business decision. Finally, when setting up a corporate structure, the choice should suit the purpose of the firm.

This post contains general information about legal matters. The information is not advice, and should not be treated as such.

Your Turn

Please let us know in the comments below if you have any questions or comments.

Jeremy Sutter

Jeremy Sutter

Freelance Journalist

Jeremy is a tech and business writer from Simi Valley, CA. He lives for success stories, and hopes to be one someday...

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