small business legal issues

Small Business Legal Issues


Common Small Business Legal Issues

Small businesses face many challenges, especially in an economic climate ravaged by the pandemic—many closed shops in the last two years. Issues small businesses face today include financing, cash flow, management, credit access, and more. Many of those issues will involve the legal system. So let's look at some of the most common small business legal issues that require support from business lawyers.

Before doing so, it's worth pointing out how vital small businesses are to the economy. First, the U.S. Small Business Administration (SBA) defines a small business as an organization with fewer than 500 employees. However, most small businesses employ fewer than 100 people. For example, 88.1% of small businesses employ fewer than 20 people.

Small Businesses Help Drive the Economy

As the saying goes, they may be small, but they're mighty. These businesses, numbering some 32.5 million organizations, employ 47.3% of the American workforce. Not too long ago, that number was closer to 52%.

In addition, since 2000, small businesses have driven 65.1% of net new job creation. Plus, they create 1.5 million jobs annually on average.

Unfortunately, 20% of small businesses fail in the first year. Moreover, nearly 50% fail within the first five years of operation, mainly due to a lack of market demand.

The Threat of Legal Action

A study by the SBA found that up to 53% of small businesses deal with lawsuits annually. Still another study presented that 43% of small businesses faced the threat of being sued. As a result, for small business owners, it's essential to have expert legal representation from a business lawyer near you.

On top of that, those lawsuits are expensive. According to the SBA, litigation costs range from a low of $3,000 to a high of $150,000. As a result, as many as 95% of lawsuits get settled before trial. For many business owners, it's less painful to reach an agreement than face litigation costs and attorney fees.
Breach of contract (31.4%) represents the most common lawsuit filed. So, if you own a business, make sure you have a paper trail supporting your negotiations. Even more important, make sure a qualified business lawyer executes that paperwork.

Interestingly, depending on the size of your organization, you're more likely to face specific kinds of legal issues requiring the support of attorneys or business lawyers near you. Here's what a study by Kingston University on The Legal Needs of Small Business found:

Chart detailing Kingston University's findings on The Legal Needs of Small Business

Impacts of Legal Issues on Your Small Business

In the wake of legal actions, small businesses endure many outcomes, none good. Yet, many business owners view hiring a local lawyer as a last resort, with many owners electing to handle things themselves. Looking at the outcomes, it's likely they would have faced better results working with business lawyers.

Among those outcomes:

  • Loss of income (25.6%)
  • Loss of customer (9.2%)
  • Additional costs (8.8%)
  • Inability to complete work scheduled (8.7%)
  • Damage to reputation (8%)
  • Damage to a relationship with another business (7.4%)
  • Failure to take on new work (5.2%)

Not surprisingly, some issues resulted in a change of ownership or company structure.

6 Common Small Business Legal Issues

So let's get to it. What types of legal concerns should you expect if you're running a small business? Although contracts and taxes comprise more than half of small business legal issues, you'll encounter more. So, make sure you have a good business lawyer on speed dial.

1. Business Formation

It all starts here. Business formation significantly impacts your liabilities and profitability. Each business structure – LLC, S Corp, Partnership, or Corporation – has benefits and drawbacks. How you form your business determines your liability, tax payments, and other details for running your business.

For example, as a sole proprietor, you and your business are one. So if your company gets sued, your assets are at risk.

Sure, you can form your business using a website. But at this critical step, it pays to work with a business attorney to get the job done right. After all, you're forming your business and want to get off on the right foot. Moreover, if you do your homework, that business lawyer likely becomes your trusted advisor as you advance your business and avoid legal issues for your small business down the road.

2. Licensing

Do you know the government restrictions for licensing? If you're like most people, probably not. Costs and requirements vary based on location (a good reason to have a lawyer versed in PA laws). Plus, regulations cover stipulations for each business type. Therefore, they vary based on size, type, and business location. Moreover, they're impacted by the goods or services you provide.

However, if you fail to license your business correctly, you'll likely face some hefty fines or fees. Worse still, your business could be closed. That's why it's wise to avoid licensing concerns by consulting with a business lawyer.

3. Contracts

Contracts drive business. And there's a good reason you often hear the phrase; get it in writing. Unfortunately, too many small business owners rely on ambiguous contracts or, worse still, no contract. More than 37% of legal issues arise from contract issues.

Relying on self-serve internet contracts doesn't adequately cover potential loopholes. A business lawyer can draft contracts for your small business that keep you out of hot water and avoid legal issues.

You must tailor every contract to the condition and requirements of the agreement. Moreover, they need to be ironclad. That holds whether you're executing a real estate agreement, employee contract, or franchise agreement.

So, work with a contract or business lawyer to review any contract, draft original contracts, or address contract disputes. Never, and we mean never, enter into a contract with another party sans a legally-binding agreement, preferably drafted by an attorney or lawyer.

4. Taxes

If you're going to own and operate a business, you will pay taxes, both federal and state. But know this – tax laws get complicated. And they present an ongoing potential legal issue for any small business. So you need to retain the services of an accounting professional or tax attorney to avoid issues. They can help address what taxes you're required to pay, when to file, how to make payments, and more.

5. Employee Issues

Where to start? Employee issues present significant risks for small businesses. For instance, many companies fail to acquire appropriate documentation from employees. Still, others don't take the time to draft good handbooks and policies for employees.

Those policies prove helpful for disciplinary, overtime disputes, and termination issues. But, again, a business lawyer ensures you'll have the appropriate documentation.

In Pennsylvania, small business owners need to be concerned about Wage Payment and Collection Laws (WPCL). Otherwise, they could face liabilities leading to litigation, as PA has one of the strongest laws in the country.

For small businesses facing stiff competition or having proprietary knowledge, non-solicitation agreements are critical. For example, you need to ensure employees face the consequences of moving to another company and handing out customer lists. Or for starting their own business and using your knowledge to do so.

Talk to an employment lawyer about the ins and outs of your small business to make sure you are covered with rock-solid employee agreements that avoid legal issues.

You even face concerns about employee misclassification. For instance, classifying someone as an independent contractor may cause backlash from the Federal Department of Labor.

We haven't even mentioned legal concerns surrounding discrimination or harassment. Remote workforces bring additional challenges to these areas. Employment lawyers or business lawyers have the expertise to address them accordingly.

Again, you can elect to handle these above concerns yourself or by downloading internet documents. But you owe it to yourself and the well-being of your business to consult and work with a nearby business lawyer from a reputable law firm that understands PA laws.

6. Intellectual Property

It would help if you protected your IP, lest another party steals your name or copies your intellectual property. However, independent of safeguarding your property, you need to ensure you don't overstep IP law and accidentally infringe on a trademark by failing to conduct thorough research. A trademark or business lawyer has access to appropriate resources to handle searches and ensure you avoid legal ramifications.

We touched on how employees might pilfer proprietary knowledge and give it to a competitor. And that raises this point – too many small businesses fail to take care of their intellectual property covering copyrights, patents, and trademarks.

Ready to Hire a Business Lawyer?

Starting your own business is risky to start. Remember, 50% of startups go out of business within five years. In addition, circumstances outside your control make it even more challenging, like a pandemic. So why add more risks to your venture by not hiring an experienced business lawyer to support your company?

Our law firm serves clients in Pennsylvania, New Jersey, and the mid-Atlantic region. Our attorneys and lawyers have experience in numerous areas critical to running a successful business – employment law, IP law, workers' compensation, franchise law, and more. And if you ever need it, we're also experienced litigators.

Don't make a critical mistake launching your business. Hire a business lawyer. There's no better way to ensure your company gets off to the right start to avoid small business legal issues.

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