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  • Writer's pictureDavis Yu

5 Common Legal Issues Small Businesses Face

June 21, 2024

  1. Disputes Over Business Ownership

As part of proper business formation, business owners must take certain steps such as selecting a business structure, timely filing formation documents, and designating managing parties to ensure that the business continues to operate smoothly. Despite complying with these requirements, business ownership disputes often continue to arise. Owners may run into disagreements about certain decisions like compensation or short and long-term goals and objectives, or even realize that they can no longer work with each other. In other circumstances, owners might engage in fraudulent or self-dealing acts causing substantial financial harm to the company. Depending on your business’ structure, it is always important to form and periodically update controlling documents like an operating agreement that expressly lays out the company’s rules and policies, obligations of each party, and consequences of major events (e.g., owner's breach of fiduciary duties).

2. Breach of Contract

Generally, contracts, whether written or oral, surround every aspect of a new business. However, a small business may often fall into entering into contracts with unfavorable terms or increased risks. An attorney’s review can certainly help minimize the risks; however, many businesses skip this step to minimize costs. Without clear guidelines and terms, bigger problems may arising including exposing the owners’ personal assets to third party claims, missing deadlines or obligations for performance resulting in lawsuits, and potentially spending way more money to help resolve the dispute versus retaining an attorney from the start to review your business’ contracts. As such, legal counsel can help ensure that a business is not subject to unfavorable terms, fully understands the contractual relationship between the parties including the obligations, risks, and potential outcomes of such dealings, as well as help instill peace of mind that the priorities and goals of the business are always at the forefront.

3. Infringement of Intellectual Property (IP) Rights

IP rights refer to the legal protection of valuable intangible assets from use by other third parties. For instance, a company’s name, brand, logo, and inventions cannot be used without permission of the creator. Some companies may not even realize that they are using engaging in IP infringement. For example, incorporating an image that was downloaded from the internet on your company’s website without authorization could be grounds for a lawsuit.  A simple act like this can result in detrimental consequences severely impacting your business’ reputation and profitability. Infringing parties can be required to pay damages and profits to the other party, face jail time and heavy monetary penalties with some rising to as much as $250,000 as well as pay substantial attorneys’ fees that add to the outstanding liabilities of the company. Consequently, these acts can have severe impacts on the business contributing to its downfall.

4. Violations of Employment Laws

As a business continues to grow, the hiring of employees can prove to be very helpful but increases the likelihood of running into employment legal issues. Employment laws vary by state and must be strictly complied with. For example, employees typically require timely rest and meal breaks, specific minimum wage, and protected leaves of absence. Additionally, employers are prohibited from engaging in any acts of discrimination and harassment in the workplace.

Aside from employment laws, businesses are also at risk of facing lawsuits arising from workplace injuries. Workplaces must be free of any known health and safety hazards, which typically results in personal injury or property damage, illness, or even wrongful death. Negligence on behalf of the employer can lead to the payment of the employees’ damages which include without limitation, lost wages, medical expenses, and pain and suffering.

5. Corporate Governance

Small businesses can be structured in different ways. The options for structure include a sole proprietorship, limited liability company (LLC), a partnership, or corporation. Each entity has its specific set of legal requirements that must be complied with in order for the business to continue operating. These requirements might include filing a statement of information annually or holding a board of directors meeting and recording minutes. Certain industries might also require additional licensing or meet state specific regulations to operate. Failing to comply with legal requirements can result in penalties, fines, or even closing the business down.

Starting a business regardless of whether on a large or small scale is no small task. It is extremely important to stay on top of legal matters to ensure that the business’ continued operations and success are not negatively impacted. Further, there may be legal considerations specific to your situation that you may not have contemplated. Laws and regulations can also change, which can add to the complexities related to your business. The attorneys at DY LAW have previously helped many business owners navigate through various legal matters. Contact us if you have any questions.

All information provided is strictly educational and does not constitute legal advice. Any past or previous results do not guarantee future outcomes as results may vary. For legal advice, please consult with a licensed attorney.



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