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5 Ways to Keep Your Small Businesses Out of Legal Trouble

If you’re a small business owner, you already know that running a small business is more than a full-time job. Depending on how small your business is, you might be the only person responsible for payroll, human resources, and managing cash flow. Wearing so many hats can be exciting, but it can also be distracting and lead to legal problems.

Below are five essential business matters that small businesses have been known to neglect, to their detriment. Make sure your business stays on the right side of the ledger (and the law) by following these tips:

Gavel about to bang in a court room

1. Understand labor laws

The minute your small business hires its first employee, you need to be aware of which labor laws, including wage and hour statutes, apply. For obligations under federal law, the U.S. Department of Labor organizes and distributes a wealth of information. The department’s elaws website (Employment Laws Assistance for Workers and Small Businesses) provides online resources for employers, particularly small businesses.

That website’s FirstStep Employment Advisor is a great place to start. It helps employers determine which federal laws and regulations apply to their particular business situation. FirstStep guides you through a series of questions to help you find information that’s relevant to your needs and interests (it’s important to remember that this covers only federal laws; be sure to research your state and local regulations as well).

Small business owners should pay particular attention to the wage and hour laws that dictate how and when employees must be paid. This encompasses topics like overtime pay (for example, whether overtime is due if the employee works more than eight hours in any single day or only if they exceed 40 hours in any given week), standard work weeks, and when a final paycheck is due. In California, for example, an employee who is terminated is entitled to their final paycheck on their last day of employment – and the check must include any accrued vacation or sick time the employee is owed.

2. Get everything in writing

This is a business basic, but it might surprise people how many small business owners run their businesses without documenting important transactions. Small business owners tend to be an optimistic lot – what pessimist would ever take on the risk of a startup? – and that optimism can get them in trouble when they agree to deals on the basis of a conversation. Remember, even if your business is small, its liabilities and obligations are just as real as those of an IBM or General Motors. Finalizing a deal on a handshake might seem sufficient in the moment, but when things don’t go as planned, a written agreement will make it easier to rectify the situation – and potentially avoid legal hassles.

“But wait,” you say, “I’ve read that oral contracts are just as valid as written ones.” And that’s legally true, but the existence, let alone the terms, of an oral contract are very difficult to prove in court. It usually comes down to “he said/she said,” and you end up paying a price for your optimism.

Take, for example, a florist providing flowers for a wedding. The florist and the bride’s parents come to agreement over the phone. No written contract is drawn up. Everything is fine until the wedding day, when the bride’s mother, unhappy with the roses when she says she ordered peonies, refuses to pay. You can argue until you’re blue in the face that you had a verbal agreement to provide roses, but without a written document outlining the exact product to be delivered, your arguments are unlikely to persuade a judge.  A written contract would have prevented this situation; what’s more, it could have included a detailed process for handling any other disputes.

This advice to get it writing applies to everything from lease agreements for linens or uniforms to real estate agreements. If your small business is service-based, it might make sense (and save money in the long run) to have a lawyer draw up a standardized agreement that you and your clients sign. You can even use a prepaid legal service option and avoid hourly or ongoing legal costs.

3. Avoid tax or licensing penalties by double-checking details

Your business will be “flying blind” if you don’t do the good bookkeeping that enables cash flow analysis and financial forecasting. But good accounting and documentation are equally important for paying your taxes properly. According to the IRS, failing to include allowances for payroll taxes in your pricing and not making estimated taxes payments on time (or at all) are common tax oversights that frequently land small businesses in legal trouble. Don’t get your business suspended because of a simple oversight.

Additionally, convoluted licensing laws frequently trip up small businesses – consider the many licenses and regulations required for a food truck. A business lawyer can quickly help you understand the requirements for your specific business, or the U.S. Small Business Administration (SBA) provides links to relevant licensing laws for both the federal government and the individual states.

4. Purchase errors and omissions insurance

Many small businesses don’t carry enough insurance or the right kind. Businesses that provide professional services often neglect to purchase Errors and Omissions insurance. This is the coverage that kicks in when a business makes a mistake and gets sued for it. People think about malpractice coverage for doctors and lawyers, but all kinds of professional businesses – from web designers to advertising agencies to wedding photographers – can be sued. And they can be sued even over honest mistakes. Having the right insurance for the right type of liabilities is a key component to a successful business.

5. Ask for help

Being responsible for the entire business doesn’t mean that a small business owner has to be an expert in everything. One key to successful leadership (and business ownership) is knowing when to ask for help. Whether you turn to government resources like the Small Business Administration or community resources like your local Chamber of Commerce, you can find experts who will help answer the hard questions or offer the advice and training you need. An attorney with experience in small business matters can also be an invaluable partner who helps you protect and grow your business.

Leigh Raper has a JD from Pepperdine University School of Law. She writes fiction and blogs about pop culture, as well as items from the world of and labor and employment law. Leigh also writes for Avvo, the leading online legal marketplace connecting consumers and lawyers. Avvo also provides on-demand legal services that provide professional counsel for a fixed cost, make legal faster and easier.

Image credit: wavebreakmediamicro

This article was first published on June 29, 2016. It was updated on