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Think your startup is too small for legal mistakes? Here are 5

Every business starts small, over even home-based. If it’s in operation, no company is too small to run into serious legal problems, and you need to take them seriously. That means choosing and forming the appropriate legal entity, developing written contracts, and setting up policies and procedures.

If you don’t set up your business as a separate legal entity, you’re be putting your personal assets at risk every time you sign a contract. Business losses should not mean the loss of your home and savings.

An article on Entrepreneur.com just listed five mistakes small businesses often make early on, most of which you can easily prevent with a little planning:

Failing to set up a written founders’ agreement as soon as you decide to work with someone. As the article points out, most of the litigation over who started Facebook could have been avoided if there had been any written agreement at all.

Starting up while working for someone else but not telling them. Even if you didn’t sign a non-compete agreement, don’t get off to a bad start by letting your current employer wonder whether you’re about to take your expertise right to its customers.

Not researching the various business entity types available. If you don’t choose one, your business’s obligations and assets will be mixed up with your own. There is no right or wrong choice, but each entity type has different investment, operational and tax rules. Base your choice on your management style, risk tolerance, and understanding of -- and ability to comply with -- a variety of tax and regulatory rules. An attorney experienced in business formation and planning is almost always worth the money here.

Failing to follow through with the legal rules for your entity. For example, you can’t just register a corporation with the secretary of state. There are initial and ongoing legal requirements, such as issuing stock, having shareholder and board of director meetings, and filing annual reports. If you don’t “act like a corporation” and you get sued, the courts won’t protect your personal assets.

Ignoring payroll taxes, including your own. Some small businesspeople forget that the IRS assumes you’re getting a reasonable salary and will tax your business as if you are. Also, resist any temptation to skip payroll taxes in tough times -- the potential for penalties and even criminal charges makes paying these a priority.

Source: Entrepreneur.com, “Incorporating? Avoid these 5 Mistakes,” Polly Brewster, Sept. 9, 2013

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