Five Legal Mistakes Every Solopreneur Should Avoid

5 Legal Mistakes

Let’s face it. Doing what we love is easy. Our ideas seem limitless and opportunities appear to be without boundaries. We feel the same way about ourselves, and we surround ourselves by people who believe the same thing.

However, the business of what we love is hard. At the intersection of “what can be” and “the way it is” our intrepid Solopreneur is left scratching her head and hoping for the best. Because hope is never an effective business or legal strategy, we must review some of the top legal mistakes solopreneurs should avoid.

  1. Delaying entity formation. Whether it is the perceived cost of competent counsel or the unpleasantness of formalities, our Solopreneur avoids organizing her business into a legally recognized entity. This delay has among other a few important ramifications.
    1. Ambiguity in taxation. In the choice of the best fit for a budding business opportunity, important tax deadlines may pass before the Solopreneur chooses how to organize and thus, how to be taxed. Unless the Solopreneur is proactive, the calendar may make the choice for her.
    2. Ambiguity in equity participation. Remember when that handshake meant everything and unicorns roamed the earth? Exactly. The only reality that exists is the reality described in writing. It is of paramount importance to understand in writing what the founders own in relationship to each other.
    3. Exposure to liability. Every day of business without formal recognition by the state as a legal entity with limited liability is a day or risk for all of our Solopreneur’s personal property.
  2. Starting while employed by a potential competitor. Many Solopreneurs have their start by working for an employer long enough to build a better mousetrap, which will become the basis for their own new business.
    1. Non-Compete Agreements. Many employees have signed non-compete agreements with their employers. The exit strategy for starting that new business may not be as easy as walking out of your employer’s door one day. It is important to understand all of the provisions of the non-compete agreement including the length of time the agreement is in force as well as any restrictions on the geography in which you are barred from working.
    2. Intellectual Property. Did you develop hat new idea, product or process while at work? Did you use your work computer or make any calls in furtherance of your new endeavor from your work phone? Did you use your work e-mail address for personal correspondence, or did you carefully segregate your work from your work-work? If you are not careful, your employer may actually own your Mousetrap 2.0 and claim any profits you are able to generate.
  3. Lack of Contracts. In the frenetic pace of a new enterprise, our Solopreneur must quickly surround herself with resources, including suppliers, vendors, contractors and others. There may be a lease and even employment contracts. Having written agreements matters and the actual details and a full knowledge of those details matter even more. Remember: handshakes do not evidence trust. Trust equals signing your name on the dotted line.
  4. No Funded Buy-Sell Agreement. Every beginning has an end. If and when our Solopreneur takes on a partner, there are fundamental decisions that they must make at the beginning of their relationship regarding the eventual exit from the relationship. This exit could be the death, disability or even divorce of one of the partners. A properly drafted buy-sell agreement lays out the rules ahead of time for the protection of everyone involved. It is equally important to fund that buy-sell agreement with a life insurance policy, and do not forget the disability insurance policy as well.
  5. State and Federal Securities Laws. As our Solopreneur’s business takes off, she will garner the attention of those who want to jump on board with the hopes of growing her business exponentially. Once investment dollars begin to flow, small mistakes can have enormous consequences. Understanding the requirements of the Securities and Exchange Commission and the fifty individual state securities commissions is a daunting task requiring good advice and practical know-how.

They say that the road to success is fraught with peril. However, if our brave Solopreneur keeps her head up and her heart strong, she can absolutely succeed. With competent and caring advisors, she can avoid many of the pitfalls she would otherwise encounter.

Maybe hope combined with knowledge is a great strategy after all.

Gavel photo by Jason Morrison on FreeImages.com

John Herbert is a partner at Herbert Sparks Law Group, LLC with a focus on small business law, providing relevant legal solutions at flat-fees. He his practice spans clients on five continents and hoping for Australia and Antarctica.

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