Hazards for Business Beginners: The Disasters Are in the Details


Small business owners may not realize the extent of the legal apparatus that governs even a small, emerging business. In fact, unintentional missteps can put you on the wrong side of the Securities and Exchange Commission (SEC), the Federal Trade Commission (FTC), and the Internal Revenue Service (IRS), or expose you to lawsuits over patent and trademark infringement. On the plus side, taking proactive legal steps—writing good contracts and spelling out agreements with partners and investors—can help you build a solid foundation for your fledgling enterprise.

Issues faced by new business owners include:

How to Avoid Common Mistakes

  • Not using formal contracts with partners, vendors, or investors
  • Failing to place vesting restrictions on founders’ stock
  • Falling behind the curve on rapidly changing securities regulations
  • Violating advertising regulations and infringing on others’ copyrights and patents
  • Failing to incorporate in Delaware if you hope to attract venture capital
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Do You Understand “Due Diligence”?

  • You need to manage the risk inherent in all key relationships
  • Consider conducting Internet searches or formal audits
  • Criminal background checks may be needed for key positions
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Why You Should Never Mix Funds

  • Sole proprietors may not realize they need to maintain separate accounts for the business and their personal finances
  • If you don’t maintain separate accounts, you risk having the Internal Revenue Service (IRS) classify the business as a hobby and disallow deductions
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How to Plan for Success and Failure

  • The odds of success are better than advertised
  • You still need to plan for all contingencies
  • Your business plan needs to reflect the future you envision
  • Governing documents and contracts should have language that specifies what will happen in case of failure
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