Small Business Legal Issues

How to address or avoid legal issues facing small businesses

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What are the Biggest Legal Issues Small Businesses Typically Face?

Like their larger counterparts, small businesses face a myriad of legal issues in their operations. The dangers of violating legal lines are legitimate threats, especially when crossing into the business world from the stance of a mere citizen. Read on to discover some of the most common legal issues a small business faces and the best ways to go about avoiding or handling them.

Small Business Legal Issues - Image of a gavel, calculator, and USD bank notes


  • All businesses face legal issues; small businesses are often focused on everything but legal matters. There are several legal issues that small businesses may face and ways to handle them properly.
  • It is important to hire employees using a contract that outlines both his or her rights AND responsibilities; it helps to prevent unnecessary lawsuits down the road.
  • It is crucial to establish the right business structure for a small business and obtain the right kind of license; failure to do either or both could lead to serious fines or lawsuits, or even cause the company to be shut down.
  • Protecting intellectual property is vital to a small business. Unique products and services, marketing plans, etc., help attract customers and should be protected by copyright, trademark, or patent.

Not Hiring Employees the Right Way

Many small businesses start out with one person who either makes something or provides a service, often out of his or her home. As the business expands, it becomes necessary to hire employees. One common mistake that new small business owners or entrepreneurs make is hiring employees with an unofficial verbal agreement (or a handshake).

Failure to enter into a signed agreement or contract is a good way to open a small business to lawsuits down the road. The owner and the employee may not face issues for a time. However, some problems may arise at some point. Without any type of document that stipulates the rights and rules of the employee, a possible result is a very messy and expensive court battle.

Make sure that from the beginning there is a contract. The contract should include information about when the employee was hired, as well as outlining the employee’s:

  • Responsibilities
  • Roles
  • Rights
  • Benefits
  • Salary/Payment
  • Potential reasons for termination
  • Date the contract was signed

Not Getting the Proper Licensing

Every business must possess a proper license that allows it to operate. There are different government stipulations for each type of business. The stipulations vary depending on the size, type, and location of the business. The business license can also be affected by the goods or services the business provides. Failure to obtain the proper licensing can, at best, cost a small business large fines and fees. At worst, it may cause the business to be shut down.

Licensing can be confusing and may be especially difficult for a business owner who is new to the business world. It may be a good idea to hire a lawyer who specializes in small businesses. He or she will be able to navigate through the paperwork and help a small business owner get the proper license.

Choosing the Wrong Business Structure

There are a variety of different structures a small business can be established as. They include partnerships, corporations, sole proprietorships, and limited liability companies (LLCs). If, for example, a small business is set up as a sole proprietorship, the owner’s personal assets (which includes the business itself) are at risk in the event that the business is sued.

Again, it’s important to hire a lawyer who can help the small business owner determine which business structure is most appropriate for their business.

Failing to Protect Intellectual Property

Small businesses often come up with excellent ideas, products, and marketing plans. However, failure to patent, trademark, or copyright them means another company can swoop in and claim them. Often, it is the unique ideas and goods a small business comes up with that makes it so attractive and draws in customers.

It is important to protect intellectual property. Sit down with a lawyer or business advisor and determine what can and should be protected by copyright, patent, or trademark.

Related Readings

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep learning and advancing your career, the additional CFI resources below will be useful:

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