Top 5 Legal Issues Facing Small Business Owners and Mitigation Techniques

As a small business owner, the last thing that you want to deal with is legal matters. Your focus should be on creating the best product or service for your customers and growing your business. However, not understanding some of the legal issues that your organization will face and how to mitigate the risk can cost your company time and money.

We have put together some of the most common legal issues that you are most likely to face as a small business owner and provided some helpful information on how you can mitigate these risks.

1. Drafting & Reviewing Contracts

Most small business owners don’t have time to fully review and understand a 25+ page contract sent over from a new vendor or even a simple 5-page contract from the new handyman you got to fix the leak. As a society we have grown accustomed to clicking the “I Agree” button whenever we see a long contract and don’t normally bother to read the full agreement believing that we couldn’t possible suffer much harm.  However, by not taking the time to review these contracts and understanding the impact to your business you are setting yourself up for failure. Though it is inevitable that you will not read every contract that comes across your desk you should understand some key provisions:

• What is the duration of the contract?
• Is there a provision that allows me to terminate the contract if I am not satisfied with the goods or services?
• What representations and warranties am I providing to the other party and what is the other party providing to me?
• If the contract is breached in any way what actions may I take to remedy?
• Does the contract require an alternative dispute resolution (“ADR”) method outside of the court system?

2. Employee Relations

Your employees can be your most valued resource and a great strength to your organization. At times, your employees can be an extension of you through their active marketing of your brand and a dedication to your vision. However, the actions or inactions of your employees can cause a foreseeable circumstance that can disrupt your organization. In the age of social media with #MeToo and #EqualPay creating a national conversation about the roles that employers play in recognizing and actively acting to make a difference, employers cannot afford to be in-tune with the needs of their employees.  Sexual harassment, equal pay, and discrimination are areas that employers must be vigilant in actively addressing within their organizations. Employers need to be cognizant of the risk associated with not having appropriate guidelines to address these issues when they arise. There are a number of ways that an employer can actively address these issues and mitigating the risk of them negatively affecting their organization.

• Outline clear company policies and making the policies readily available to your employees
• Create an employee handbook, that demonstrates your commitment to a safe and discrimination free work environment, available to new employees as part of their orientation
• Provide continual coaching & counseling opportunities to your employees so that they understand the expectations of your organization

3. Compliance

In 2010, the Small Business Administration released a report that indicated, on average, small business owners face a regulatory compliance cost of over $10,000 per employee[1]. As a small business owner, you probably don’t factor this cost in to your annual expenditures but I am sure that you realize it exist. So, the question becomes how do I make my business successful while meeting my compliance obligations? First, seek out the assistance of a legal professional who can help you understand your compliance obligations. And second, understand there are programs that you can implement in order to mitigate the risk associated with non-compliance.

• Understand your legal obligations when hiring a new employee including I-9, Employment Eligibility Verification
• Create a procedure for the keeping of records and designate a location, that is readily available, where these records can be kept for an extended period of time
• Determine if, based upon the size and industry of your organization, whether you may be exempt from certain governmental regulations

4. Litigation

Legal dramas on television have romanticized the concept of litigating whereby the average person thinks that it’s a fairly easy process that is completed quickly. However, small business owners know better. Litigation can be a daunting process and have a real impact on your business. Small business owners can face litigation from a variety of sources including suits by vendors for breach of contract, wrongful termination by a former employee, or for personal injury by a customer on your property. It would be impossible to anticipate every possible reason that a lawsuit could arise but there are certain steps that you can take to reduce your exposure and mitigate your risk including:

• Determining if inserting an alternative dispute resolution clause in your contracts is in your best interest
• Creating a written procedure that allows your employees to report issues without the fear of retaliation
• Adopting a risk mitigation policy that outlines your risk tolerance and defines the boundaries of risk that you are willing to accept
• Purchasing appropriate and adequate insurance for your organization type

5. Taxes

I am not sure who coined the phrase “the only thing certain is death and taxes” but they were spot on. In 2009, the Small Business Administration released a study that indicated that small business owners pay a significant share of the total revenue received by the federal government through income tax[2]. Small business owners have to deal with a number of different tax types including payroll, self-employment, business tax, and corporate tax. However, there is nothing worse than not knowing what taxes are owed or finding out later that if you had known, you could have avoided penalties and interest. There is no way to avoid paying taxes but there are methods for reducing your tax liability and mitigating the likelihood of penalties and interest for non-compliance.

• Understand that if you have employees then you may have the responsibility of withholding from your employee’s paycheck and remit & report to the appropriate taxing authority
• If you sell or provide certain goods and services you may have an obligation to collect sales tax and remit the tax to the proper taxing authority
• Understand that as a small business owner you may have an obligation to submit estimated quarterly payments and file information returns to the appropriate taxing authority

Navigating the intricacies of a contract, trying to understand the complexities of a governmental regulations, or dealing with the steady stream of tax law changes isn’t a top priority for most small business organizations. That’s why it’s important to have a trusted friend and advisor who can understand your business needs and help guide you through some of the legal hurdles. Whether it’s acting as outside general counsel or reviewing your current practices to provide some pointers for improvement, Robinson Legal can handle your small business needs. #RobinsonLegal

[1] The Impact of Regulatory Costs on Small Firms (Crain, 2010)

[2] Effective Federal Income Tax Rates Faced by Small Businesses in the United States (Quantria Strategies, 2009)