3 common mistakes small businesses and start-ups make

Starting your own business is an exciting time, so it’s easy to see how legal complexities get overlooked. Many small businesses and start-ups make mistakes that cause problems further down the line.

But these mistakes can mostly be avoided with the right preparation and advice. Read on to find out how you can prevent a legal misstep as you start your own business.

Choosing the wrong business structure

Selecting the business structure is the first thing you should do when setting up a business.

The main options in Australia include sole trader, partnership, company and trust-based structures. Depending on your business type, you may also consider not-for-profit or charity structures.

New businesses often choose to operate as a sole trader or partnership to save money. While these structures are simple and inexpensive to set up, they carry significant risks you may not have considered.

As a sole trader or partner, you are personally liable for any financial losses or legal issues. If something goes wrong, your personal assets – including your savings, home or car – could be at risk.

A company structure is a safer choice. When you establish a company, it becomes a separate legal entity. The company owns assets, makes decisions and enters contracts, while shareholders and directors (that’s you) benefit from limited liability. This means personal assets are generally protected from business debts or legal claims.

More complex structures, such as multi-company arrangements or trust-based holdings, can provide additional asset protection and tax benefits. However, these require expert legal and financial advice to set up correctly.

Many businesses attempt to handle structuring themselves to get started quickly and save money, only to realise later that restructuring is costly and complicated. Getting the right advice early on can save you significant time, stress, and financial risk.

Forgetting to register a trademark

New businesses often fail to register a trademark for their business or product names.

A trademark is a type of intellectual property that gives you exclusive rights to use specific words, phrases or logos. Registering a trademark means you can stop others from using your brand name without permission – which becomes important as your brand grows.

Trademarks are registered to a country and within specific industries (known as ‘classes’), and last for a limited period, usually 10 years, so you need to maintain it.

If you don’t register your trademark when you launch your own business, you could accidentally infringe on someone else’s rights, which could land you in legal trouble.

Or another business might register a similar or identical name, which might force you to rebrand. That’s a huge headache if you’ve already put time and money into creating your brand.

Registering a business name or company automatically does not automatically grant ownership of that name. The only way to secure ownership of your business or product name is by registering it as a trademark.

The cost of registering your trademark starts at $250, and you can do it online on the IP Australia website.

Trademark registration takes time – often more than eight months in Australia – so it’s important to act early.

Trying to DIY legal documents

It’s usually a mistake to DIY legal templates or use free online tools for important contracts and agreements.

While it’s tempting to save money by handling legal documents yourself, this approach can be risky. You’re much better off finding a small business lawyer who can handle this side of things, giving you some peace of mind and leaving you free to focus on what you do best.

Here are some common pitfalls:

Using the wrong type of legal document

Different business models require different terms and conditions. For example, contracts for eCommerce stores, marketplaces, SaaS businesses, and mobile apps all vary significantly. A generic template may not offer the right protection for your business.

Creating documents that actually increase liability

Legal agreements should be tailored to your needs. If you are a service provider, you need a contract that limits your liability and secures payments. A poorly drafted agreement could do the opposite, exposing you to serious financial risk.

Failing to meet regulatory requirements

Certain industries have specific legal requirements. Australian Consumer Law, for example, sets out mandatory clauses for many businesses. Using a document that does not comply with these laws can lead to fines and legal action.

Not addressing business-specific risks

Every business has unique risks. A generic contract that you find online may overlook crucial protections, such as liability clauses for damage in a cleaning service contract.

Looking unprofessional

Poorly written contracts with unclear or outdated terms can affect your credibility with potential clients. Professionally drafted agreements add legitimacy and build trust with customers.

When can DIY legal documents work?

In some cases, using a template may be appropriate, but it depends on the level of risk involved. For example, a small café with a simple website may be fine using a standard privacy policy. However, a SaaS company handling sensitive customer data should invest in tailored legal agreements.

If you’re unsure, consulting a legal expert can help you understand what you need to pay for and where you can trim from the budget.

Key takeaways

One common mistake is choosing the wrong business structure.

Another mistake is failing to register a trademark.

It is usually a bad idea to use DIY or template legal documents.

Author: Marshall Thurlow is Director and Founder of Orion Marketing Pty Ltd. He is a digital marketer with expertise in SEO, website design, content marketing, and project management.