The 5 Unexpected Legal Issues in Business that You Need to Avoid

“Entrepreneurs are crazy,” says Steve Blank, business guru and author of The Startup Owner’s Manual. Admittedly, the challenges facing entrepreneurs are daunting. As reported in the Arizona Republic, nearly 2 in 5 business owners have come close to failing. In fact, 13% said that they had previously owned a business that had failed. Additionally, nearly 2/3 of them report that “being a small business owner or entrepreneur takes more work than they expected.”

Despite these enormous challenges, the vast majority of them (96%) reported that they were glad that they had become an entrepreneur. This is why Blank suggests that:

"(Entrepreneurs) are insanely driven to bring that thing they see to fruition. And they need to be because of the amount of travails they go through in making something out of nothing. Founders create on a blank canvas; founders are closer to artists than they are to engineers or business people. They make things happen. And they need this perseverance and tenacity and resilience to drive them through those obstacles because rationally, it would make a lot more sense to just exchange your labor for money.”

Given their risk-taking nature and fast-paced work style, entrepreneurs can struggle with legal issues that result from poor planning. In his law practice, attorney Michael E. Fiffik, from Welch, Gold, Siegel & Fiffik, P.C. in Pittsburgh, a LegalShield provider law firm, sees five major legal issues that consistently face his entrepreneurial clients.

Top 5 unexpected business legal issues

1. Unfair contracts

“Every business owner has relationships governed by contracts, from lenders to suppliers to customers to employees. Business owners should always try to dictate the relationship’s terms by using their own contract. One example is purchasing materials or supplies; entrepreneurs should avoid using a vendor’s order form and create their own purchase orders with terms that are more favorable to them. The vendor may be anxious for the sale and agree to use your form instead of theirs. In the event of a dispute, your terms will offer you important protections. Which is exactly why, if you must use someone else’s contract, reading it is an absolute must. Vendors will often include very unfavorable terms in their agreements such as high interest rates on unpaid balances, personal guarantees, specifying that dispute will be governed by the law of a different state, etc. Any one of these can cripple a small business.”

2. Inadequate protections for financial information

“Business owners should guard their financial information very carefully, both inside their business (from employees who can use the information on behalf of a competitor or to share sensitive data with customers) and outside (for example, from people who might obtain a judgment against the business and then place a freeze on accounts that they are aware of). Consider using a bill-paying account that is funded with only enough money to pay the bills. Keep your cash reserves in a completely different bank.”

3. Mistakes in wage payments

“These are very common and include problems such as making illegal deductions from employees' pay for cash drawer shortages, uniforms and customer walkouts. Other issues include not compensating appropriately for overtime and mishandling tips and the tip credit. These errors almost always arise from a lack of understanding of the applicable wage laws, which can hit employers with back pay, interest, penalties and attorneys’ fees for claims filed by current or former employees. In addition, owners can be held personally responsible for unpaid wages.”

4. Handshake deals

“My grandfather was a banker at a community bank in Masontown, Pennsylvania and used to make loans on handshakes. Handshakes are important – psychologists have studied it! You can really size up a person from the way they shake hands. The nostalgia of the “handshake deal” is wonderful but the times have really changed. In today’s electronic B2B world, many business people never meet one another. In a world where first impressions are becoming harder to come by, my advice is ‘get it in writing.’ If you’re willing to say it, then put it on paper. If they will not, it may be one of those deals better avoided.”

5. Inadequate insurance

“Events that lead to insurance claims are, by their very nature, unexpected. Some business owners want to risk ‘doubling down’ on the risk by not having adequate—or sometimes any—insurance. In some instances the law requires insurance—workers' compensation, builders risk insurance being two common types. Not having adequate insurance for a property investor can be a disaster that is one freak accident away. One of my clients had a rental property that caught fire due to a tenant’s over-heated laptop left on a carpeted floor. He found out the hard way that his insurance wasn’t up to par, costing him thousands of dollars in lost revenue because he is unable to afford to repair the property.

Another client let his workers' compensation insurance lapse before one of his employees was clipped by a driver and seriously injured. Thousands of dollars and fines were incurred as a result of medical bills, lost wages and government investigation. It pays to find a good insurance broker, take the time to explain the nature of your business to them and be engaged in the process of shopping for insurance that will cover the likely risks associated with your business.