About a quarter of small businesses in the US closed during the peak of the epidemic in May 2020. Many of these stem from legal issues that could have been avoided.
Common Legal Issues in Small Businesses
Small businesses face many challenges, as many shops have closed in the past two years, especially in the economic environment ravaged by the pandemic. Problems small businesses face today include financing, cash flow, management, access to credit and more. Many of these 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 that, it’s worth noting how vital small businesses are to the economy. Firstly US Small Business Administration (SBA) defines a small business as an organization with fewer than 500 employees. However, most small businesses employ less than 100 people. For example, 88.1% of small businesses employ less than 20 people.
Small Businesses Help Drive the Economy
As the saying goes, they may be small, but they are mighty. These businesses, comprising approximately 32.5 million establishments, employ 47.3% of the American workforce. Not so long ago, that number was close to 52%.
In addition, since 2000, small businesses have driven 65.1% of net new job creation. They also create an average of 1.5 million jobs per year.
Unfortunately, 20% of small businesses fail in the first year. Also, about 50% fail within the first five years of operation, mainly due to lack of market demand.
Threat of Legal Action
A study by the SBA revealed that 53% of small businesses deal with lawsuits each year. Yet another study found that 43% of small businesses are at risk of being sued. As a result, it’s essential for small business owners to have an expert legal representative from a business attorney near you.
Moreover, these cases are expensive. According to the SBA, litigation costs range from $3,000 to $150,000. As a result, 95% of cases are settled before trial. For many business owners, reaching a settlement is less painful than facing litigation costs and attorney’s fees.
The breach of contract (31.4%) represents the most frequent lawsuit. So, if you have a business, make sure you have a paper trail that supports your negotiations. More importantly, make sure that a qualified business attorney handles this paperwork.
Interestingly, depending on the size of your organization, you are more likely to run into certain types of legal issues that require the support of lawyers or employment lawyers near you. Here’s a study by Kingston University on the Legal Needs of Small Business:
Effects of Legal Issues on Your Small Business
After legal action, small businesses suffer many consequences, none of them good. Still, many business owners find hiring a local attorney as a last resort, and many business owners choose to handle things themselves. Judging by the results, they are likely to experience better results than working with employment lawyers.
Among these results:
- Loss of income (25.6%)
- Loss of customers (9.2%)
- Additional expenses (8.8%)
- Failure to complete the planned work (8.7%)
- Damage to reputation (8%)
- Damage to the relationship with another business (7.4%)
- Inability to start a new job (5.2%)
Not surprisingly, some issues caused ownership or company structure to change.
6 Common Small Business Legal Issues
Let’s get to it. What legal concerns should you expect if you run a small business? While contracts and taxes account for more than half of small business legal problems, you’ll encounter more. So make sure you have a good business lawyer on speed dial.
1. Business Formation
Everything starts here. Starting a business significantly affects your liabilities and profitability. Every business structure – LLC, S Corp, Partnership or Corporation – has its advantages and disadvantages. How you set up 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 sues, your assets are at risk.
Of course, you can build your business using a website. But at this critical step, it’s a good idea to work with a business lawyer to get the job done right. After all, you’re starting your business and want to get out on the right foot. Plus, if you do your homework, this business attorney will likely be your trusted advisor as you keep your business moving and avoiding legal trouble for your small business down the road.
Do you know the government restrictions for licensing? If you’re like most people, probably not. Costs and requirements vary by location (a good reason to have an attorney with a good command of PA law). In addition, regulations cover: terms for each type of business. Therefore, they vary in size, type, and workplace. They are also influenced by the goods or services you provide.
However, if you can’t properly license your business, you will likely face some hefty fines or fees. Worse, your business could be shut down. Therefore, it is wise to avoid licensing concerns by consulting an employment attorney.
Contracts drive trade. And there’s a good reason you hear this phrase often; get it in writing. Unfortunately, too many small business owners rely on vague contracts, or worse, no contracts. More than 37% of legal problems are due to contractual problems.
Relying on self-service internet contracts does not adequately cover potential loopholes. A business attorney can draft contracts for your small business that keep you out of hot water and avoid legal trouble.
You must adapt each contract to the terms and requirements of the contract. In addition, they must be iron-clad. This applies whether you are executing a real estate contract, employee contract, or franchise agreement.
Therefore, work with a contract or employment attorney to review any contract, draft an original contract, or handle contract disputes. We mean never, ever, enter into a contract with another party, preferably without a legally binding agreement drawn up by a solicitor or solicitor.
If you are going to own and operate a business, you will pay both federal and state taxes. But know this – tax laws get complicated. And they present a potential ongoing legal challenge for any small business. That’s why you need to retain the services of an accounting professional or tax attorney to avoid problems. They can help you deal with what taxes you have to pay, when to file, how to pay, and more.
5. Employee Issues
Where to start? Employee issues present significant risks for small businesses. For example, many companies are unable to obtain the appropriate documents from their employees. Still, others do not take the time to devise good handbooks and policies for employees.
These policies help with discipline, overtime disputes, and termination issues. But again, a business lawyer will ensure you have the proper documentation.
In Pennsylvania, small business owners have to worry about the Pay and Collections Laws (WPCL). Otherwise, they could face litigation liabilities as the PA has one of the strongest laws in the country.
For small businesses that face stiff competition or have proprietary knowledge, off-demand deals are critical. For example, you need to have employees face the consequences of moving to another company and distributing their client list. Or to start your own business and use your knowledge to do it.
Talk to a business attorney about the ins and outs of your small business to ensure you’re dealing with very solid employee contracts that avoid legal trouble.
You even have concerns about employee misclassification. For example, classifying someone as an independent contractor may provoke a backlash from the Federal Department of Labor.
We didn’t even mention legal concerns about discrimination or harassment. Remote workforce brings additional challenges to these areas. Business lawyers or business lawyers have the expertise to address them appropriately.
Again, you can choose to take care of the above concerns yourself or by downloading internet documents. However, you owe it to yourself and your business’s well-being to consult and work with a nearby business attorney from a reputable law firm who understands PA laws.
6. Intellectual Property
It will help to protect your IP against another party stealing your name or copying your intellectual property. However, regardless of protecting your property, you need to do a thorough research to make sure you don’t breach intellectual property law and inadvertently violate a trademark. A trademark or business attorney can access appropriate resources to conduct searches and ensure you avoid legal consequences.
We touched on how employees can steal private information and give it to a competitor. Which brings up the point – many small businesses don’t care about intellectual property rights, which includes copyrights, patents, and trademarks.
Ready to Hire a Business Lawyer?
Starting your own business is risky. Remember, 50% of startups close within five years. Also, circumstances beyond your control make the situation even more difficult, like a pandemic. So why add more risk to your venture by not hiring an experienced employment attorney to support your company?
Don’t make a critical mistake when setting up your business. Hire a business lawyer. There is no better way to get your company off to the right start to avoid small business legal trouble.