The Laws of Small Business: Five Legal Mistakes to Avoid

Photo by Stafford Rosenbaum

Small businesses enhance the charm of places like Madison. They absorb their surroundings and reflect back the goodness of home. The role they play is rewarding, but keeping them running is no easy feat. Their owners are masters in multitasking, overseeing every detail from crafting a brand to hiring an employee. While big companies can rely on entire legal departments to plan for risks, small-business owners must manage this task themselves.

Jeff Schneider is an attorney at Stafford Rosenbaum (, a firm of 50 attorneys based in Madison for 135 years that prides itself on serving other local businesses and helping them thrive. Jeff works with small- and medium-sized businesses, addressing their entire range of legal needs. Whether youre an aspiring entrepreneur or a seasoned business owner, youll want to jot down these suggestions for what not to do.

Waiting until something goes wrong to call a lawyer.

Business owners often dont hire a lawyer until a dispute is already under way. This can be a costly way to protect your business, especially if litigation is involved. By playing defense and mitigating risks up-front, businesses can significantly reduce the amount of time and resources used.

Jeff suggests viewing your attorney as more of a counselor than a trial lawyer. Small-business owners are focused on running their business and sharing their passion, not necessarily on examining the unique risks their business faces. A trusted attorney can act as an advisor in this way. We are notorious for looking for all the things that could go wrong down the road, jokes Jeff.

One of Jeffs clients who is starting a business asked him to review her lease and franchise agreement ahead of time. Some people would think, oh, people use these agreements all the time, Im sure its fine, says Jeff. But asking for a wording change ahead of time is much easier than disagreeing after the contract has been signed.

Not formalizing contingency plans.

When people decide to start a business together, they usually have similar visions. Indeed, it would be strange for partners who didnt tend to agree on the big things to go into business. But what happens several years in when the company has a major decision to makewhether to hire a key employee, add a product line, or accept a purchase offerand the owners disagree? Jeff worked with one client who was locked in a disagreement with his own sister about overtime pay.

If the business owners have formalized agreements in writing that include contingency plans, sorting it out could be smoother. Buy-sell language can provide a mechanism for one party to buy another party out and allows that party to exit the business in a way that is far less messy than litigation. It can also be used in situations where one of the partners can no longer be involved in the business. No one goes into business together expecting things to go sour, but your business agreement should include a road map of what will happen if things do change.

Rushing into real estate transactions.

Real estate transactions might seem relatively straightforward, but they are often more than deals between buyers and sellers. Commercial buyers, in particular, should be aware of the risks encroachments and poorly documented easements pose to real estate assets. Encroachments are intrusions on the land or property of another, such as a building structure that crosses the legal property line, while easements are rights given to others to use your property. Problems can arise if easement descriptions are missing or inaccurate or if actual practice does not match the contract wording.

Jeff stresses the importance of having a survey done prior to closing a deal, stating, We often find things are encroaching on the property that nobody knew about through surveys.

photo by Cara Lombardo

One of his clients discovered landscaping that crossed onto his lot. Issues like this can be handled by selling a small piece of property or granting a permanent easement. Ignoring encroachments or failing to clarify easements can lead to problems later on when you try to sell the property or a new neighbor moves in and interprets the situation differently.

Relying on generic contracts.

Strong contracts make a strong business. Contracts can protect an entitys core components, including its brand name, client list, or vendor relationships. The more tailored a contract is to a specific business, the stronger it tends to be. Unfortunately, I think a lot of small businesses find contracts on the internet and try to use those, says Jeff. He recently reviewed a commercial lease that appeared to be various portions of different lease agreements pieced together. When new provisions are tacked on year after year without thoughtful review, the intent becomes garbled or even contradictory, and the contract loses worth. In an effective contract, each sentence serves a clear purpose and works in conjunction with everything else. Boilerplate clauses that might seem superfluous can actually be vital.

Businesses who sign agreements with several employees, vendors, or customers should consider working with a lawyer to draft templates that can be used repeatedly. Its helpful to have a clean agreement in place that you can use with all of your customers, for example, Jeff says. At the very least, he recommends getting contracts reviewed by attorneys who can draw on their experiences with how clauses tend to be interpreted and how court cases have been ruled.

Mixing business and personal affairs.

Most people forming a business know to set it up as an LLC or a corporation, which creates a separation between the business and owner and helps prevent the owner from being personally liable for obligations of the business. Nonetheless, some people still have a tendency to use their small business as a personal bank account. If the separation isnt always clear in appearance, courts could have cause to break through the corporate shield and target personal assets of the owner.

Jeff recommends small-business owners make their intentions to operate stand-alone entities indisputable by always using separate bank accounts, not mixing funds, and maintaining official documentation such as accounting records and meeting minutes.

Small businesses are in it for more than the bottom line. Because their owners and employees live and work in the same community as their customers, their tailor-made offerings can celebrate and enhance their customers lives. The beauty of the local yarn shop, neighborhood hardware store, or your favorite farmers market stand is more than the unique products and personal service; its the connection you feel as you walk away. Heres to taking the steps to protect these treasures.

Cara Lombardo is a writer and a CPA.

Photographs provided by Stafford Rosenbaum unless otherwise indicated.

Editors note: As of June 1, Jeff Schneider no longer works at Stafford Rosenbaum, but the firm continues to serve small businesses.