Dangers of Starting a Small Business Without Legal Advisors

If you go start a business without investing in legal advisors, you could be setting yourself up for failure.

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Dangers of Starting a Small Business Without Legal Advisors

Here's what you need to know:

  • It's important to get legal advice when starting a business
  • Many small business lawsuits stem from HR issues
  • Liability insurance can help shoulder some of the costs from a lawsuit

When starting a small business, do you really need a legal advisor? After all, the paperwork and labor laws may seem straightforward to a business with a small team. However, small business disputes are far more common than most business owners realize. According to the Small Business Administration, up to 53% of small businesses have been sued annually, and 43% have been threatened with a lawsuit. And resolving these disputes is expensive for the average small business owner. Each case can cost up to $150,000, especially if a case goes to trial.

But even if it only costs a few thousand to settle, consider the bad publicity and lost time. That can result in thousands more in indirect costs, missed opportunities, and poor reputation.

Investing in a small business attorney and relevant legal services can help businesses prevent potential lawsuits and reduce the likelihood of going to court, thus reducing costs.

A small business attorney may be an additional expense, but it can save you thousands of dollars in the long run.

From filing the correct business structure to advising during litigation and asset protection, having access to a business attorney can save business owners headaches and long-term costs.

There are several areas in small business law where business owner requires legal counsel. Outside of general business law, which covers most day-to-day topics, there are specific niches such as:

  • Intellectual Property law
  • Mergers and acquisitions
  • Employment law
  • Contracts
  • Taxes

Due to more businesses running on data from customers, they may also need to review how their electronically stored information (ESI) policies from the perspective of small business law.

With the rise of remote work, there are even more questions regarding business law, including seemingly simple activities like timesheets.

Many small business lawsuits stem from HR-related issues.

Most businesses will only need a general business attorney or a firm specializing in employment law for legal advice, in part because many lawsuits stem from HR. Common litigation that a small business can fall into are:

  • Breach of contract violations
  • Wrongful termination
  • Employment discrimination
  • Wage law violations
  • Torts

A business attorney can help businesses avoid these common forms of litigation through drafting solid legal documents, ensuring that there are no unintentional discriminatory business practices or policies, and recommending relevant insurance to cover items like torts. After all, in many cases, business owners aren’t intentionally violating these laws. Having a second pair of eyes review business practices and legal documents can sometimes be enough to prevent potential issues.

Finding the right legal advisor

The next factor for most small business owners is how to find the right law firm to assist their business.

There is more to choosing the right legal advisor than subject expertise and cost. A small business owner might also want to review a law firm’s client base, state bar association standing, and any written materials from their attornies. Many law firms also niche down into specific industries, and it may be a good idea to go with a legal counsel that knows your industry inside and out.

What’s your biggest 2022 HR challenge that you’d like to resolve

Answer to see the results

Finally, many small businesses avoid legal counsel because of the expense of maintaining a law firm or attorney. Typically, small business law firm fees can range from $100 to $400 an hour.

However, there are several ways to hire an individual lawyer or law firm, including:

  • Fee-based: A small business owner can choose to bring on an attorney for general counsel for certain questions or for an audit. After discussing the scope of a businesses’ requirements, an attorney will provide an hourly rate and the estimated amount of hours it will take to complete the work. You can also hire an attorney on a consulting basis.
  • Equity: In this case, the business structure provides equity to a lawyer in lieu of cash payment. This method should have a detailed contract to ensure that the partnership is equal for both parties. This may be more common in tech startups than in other small business structures.
  • Retainer: For those small businesses that require ongoing legal services, a monthly retainer fee is common. Not only is the cost of the legal services predictable and easier to budget, but these deals are often lower-cost than ad hoc, fee-based projects.
  • Pro-bono: Finally, a law firm may decide to provide services at no cost. Non-profit firms and law schools typically offer these pro-bono legal services, but there are restrictions based on income or circumstances. For those in dire need of legal service or free legal advice, it’s important to ask how to qualify for these programs.

An individual business lawyer’s fees are set based on a number of factors, including the scope of work, their experience, and the specificity of the work required.

How to protect yourself from lawsuits

There are generally two ways to protect your business from getting used. The first is to employ a legal advisor to review company policies, contracts, and other miscellaneous situations. Secondly, business owners can choose to invest in insurance.

Liability insurance won’t help you avoid a lawsuit, but it can help you shoulder some of the costs.

Liability insurance may not be able to avoid a lawsuit, but it can shoulder some of the costs. There are several divisions of insurance to choose from, depending on your specific industry and needs:

  • General Liability Insurance covers everyday missteps and accidents.
  • Workers Compensation Insurance takes care of potential injuries, illnesses, and lost wages that can occur in the workplace.
  • Product Liability Insurance will protect a company in case of a customer claims injury from using the business’s product or services.
  • Automobile Liability Insurance provides coverage when company vehicles are involved in an accident.

Other ways to reduce risk

It’s hard for HR and small business owners to navigate ever-changing employment laws. Aside from keeping a legal advisor, it’s essential to maintain proper documentation and ensure your compliance requirements are updated.

Need help with compliance? Check out our guide of over 100 compliance dates, deadlines, and reminders.

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