5 legal mistakes to avoid when starting your business

legal mistakes when starting a business
(Last Updated On: May 28, 2022)

Congratulations! Finally, you have decided to set up your dream business. But are you prepared to swallow the bitter pill and scope out any legal mistakes you might make before it takes off?

Let’s begin with what NOT to do when you start a business.

While making mistakes is an inevitable part of the business game, legal mistakes often cannot be undone.  Small businesses are at a higher risk of committing common legal mistakes that can put them at great risk. Here are the most common legal mistakes you need to watch out for.

1. Not choosing the right business structure

There are three legal business structures that you can choose from to set up a business –

  • Sole Propetiroships
  • Partnership firms (LLCs)
  • Company (Public or Private limited)

Failing to establish the right legal structure for your business hurts you in the long run. Investors will backout, employees will leave, and customers will stop visiting your site. 

How to solve this problem:

Determine which structure works the best for your company specifically. Research well, weigh all the pros and cons of each business structure and implement the decision when all the loose ends are tied up. Do not hesitate to take an attorney’s help to reach a decision.

The new definition of MSMEs: The Indian Government also eased the rules, GST regulations and classification of MSMEs this May. In a nutshell, this is how you can classify your enterprise.

  1. Micro units – Investments up to Rs. 1 crore and turnover of fewer than 5 crores.
  2. Small unit – Investment up to Rs. 10 crores, turnover of less than Rs. 50 crore.
  3. Medium unit – Investments up to Rs. 50 crore,  turnover of less than Rs. 250 crores.

Also read: Register your business with Udyog Aadhar Memorandum

Not protecting your intellectual property

You have decided on a business name, a brand kit, and even a marketing strategy! Now, what will happen if someone steals it all?

If you fail to protect your intellectual property, you are basically giving permission to anyone to steal your idea and project it as their own. Fighting over the rights would do you no good if you fail to patent /trademark it.

As a micro-business, it is crucial for you to protect your intellectual property to ensure that your product remains rightfully and legally yours. This also ensures you comply with Intellectual property law and avoid making a legal mistake by copying another business’s logo, watermark or copyright.

How to solve this problem:

In case someone attempts to duplicate your product as their own, you’ll have a stronger ground to fight on and retain your property, if you COPYRIGHT your ideas. Request an attorney to make an inventory of your business’s intellectual property.


Overlooking human resource guidelines

When you set up a business that employs other people, it is important to keep guideline in place that protects their employment. Maintaining ideal business relationships with your employees is a must.

Your workers and employees are your biggest assets and it is important to remember that they have rights which should be protected through guidelines and policies. Overlooking HR guidelines and taking the matter lightly have caused a number of businesses to go bankrupt due to lawsuits filed by existing or former employees.

How to solve this problem:

Consult an HR expert and prepare HR policies that would fit your company and respect your employees. This will also ensure a streamlined hiring process and loyalty among your workers. Your small business needs to draw up employment contracts, wages system, offer letters, termination and notice contracts and a culture code to prevent any lawsuit.

Not filing Income Taxes correctly

Simply put, ensure your company follows the Income Tax and Company Law Rulebook.

Filing taxes is a critical matter and any discrepancy would compel legal problems to come knocking at your door. Make sure that all the appropriate taxes are filed on time and in an accurate manner.

Small businesses are legally obliged to collect payroll and sales taxes. Trying to get away with not doing so is probably the biggest legal mistake made by entrepreneurs.

How to solve this problem:

Stay updated with the deadlines for filing taxes and ensure that your vendors have paid you on time and in full. Maintain GST invoices and keep payments online! It doesn’t take too long for the Government agencies to shut down any kind of business if taxes are compromised in any manner. Separate your personal and business finances, and to collect sales taxes and don’t hesitate to engage an expert’s help.

Also read: What taxes apply to your small business in 2020? 

Not maintaining written agreements 

If you hire a lawyer when setting up a business, the first piece of advice they give you is to register your business and provide a disclaimer, terms of use and privacy policy under the Information Technology Act. Failure to do so could end your company in legal trouble.

How to solve this problem

With the help of a legal advisor, ensure every partnership is in writing. Maintain contacts with clients, keep books of accounts (income and expenditure) and get a Shareholders agreement in place. Proper documentation helps in claiming the deduction of expenses under the income tax act, avoids any legal liability and saves your business from a liquidity crunch in the future.

LegalWiz – a business solution for all your legal needs

Remember that if you find yourself in a legal problem, never try to handle it on your own to save money. Get in touch with an attorney and figure out the right way to overcome such situations. In fact, we have one for you. Leglawiz.in, in partnership with our mojo developer program, has launched 3 apps to help you register a business entity, protect intellectual property through trademark registration and file GST online.

Read all about their unique legal compliance package for SMEs here 

You can also learn a little about legal requirements for your business and avoid any legal mistakes with our mojoVersity course – Legal and Compliance Matters Simplified for Startups & SMEs, powered by Legalwiz.in.

Sign up for Instamojo