By Pablo E. Perez, Esq.
All startups, family businesses, and early-stage entities must maintain a competitive advantage to survive. Although that drive is necessary, it can also exacerbate legal risks. Businesses in any stage of development can avoid the missteps that could create long-term liabilities which may then erase revenue gains and turn away investors. Following is a practical look at the most common pitfalls businesses face when they operate without legal guidance, and why those oversights are far more costly than the expense of ongoing legal advice.
- Ignoring Corporate Formalities and Losing Liability Protection. Many entrepreneurs assume that forming a business, or acquiring one, automatically protects them from personal liability. However, failure to maintain distinct business assets, skipping required resolutions, neglecting annual filings, or ignoring structural agreements can undermine the liability shield entirely. If a dispute arises, a businessowner may avoidably be held personally liable if they failed to respect legal formalities.
- Overlooking Tax Compliance & Triggering Avoidable Penalties. Fast-moving startups often take a “act now, file later” approach to taxes. However, proactive tax planning is essential for avoiding penalties, audits, and double taxation. Misclassifying workers, neglecting sales tax obligations, missing quarterly estimated payments, or simply choosing the wrong tax structure for your business can snowball into significant liabilities that can result in costly remedies.
- Relying on Informal or Poorly Drafted Contracts. Well-intentioned, but vague, contracts are one of the most common and damaging mistakes made in business. The issue is relying on templates, handshake agreements, or borrowed language that fails to reflect the actual business relationship. As a result, a contract may be touting unenforceable terms, unclear intellectual property (IP) rights, unlawful non-competes, or clauses that fail to adequately allocate risk. If a dispute were to arise, the contract that one thought would protect the business could instead become a liability.
- Underestimating Compliance Regulations. Misclassifying employees as independent contractors or assuming flexible arrangements without expectation of scrutiny is another expensive mistake. This underestimation can create tax liabilities, wage claims, and statutory penalties, especially under Colorado’s rapidly changing employment framework which can also expose business owners and employers to personal liability.
- Failing to Protect IP at the Outset. Startups sometimes overlook assignment agreements, trademark filings, trade secret protections, or licensing terms. When IP ownership is unclear, particularly with contractors or early investors, the company’s most valuable assets can become contested. This is a common point of concern for investor due diligence and can be a frequent source of founder disputes.
In summary, most of these pitfalls are avoidable with a focused legal review undertaken well before the problems materialize. The expense of early planning is minimal compared to a possible loss stemming from foundational mistakes. Whether you are launching a new venture, acquiring a business, or evaluating your risks as a stakeholder, securing legal guidance can assist you in avoiding the missteps that can slow down, or sink, an otherwise promising business. An experienced business attorney can review your entity structure, contracts, and compliance risks to ensure your due diligence matches your ambition.
