Common Legal Issues For Businesses

Part of the American dream is to own a successful business. Yet, some business owners are trying to avoid the nightmares caused by legal issues surrounding employing people and financial transactions. The good news is that common legal issues can be managed – and in many cases prevented – with smart planning and legal guidance. The following highlights some of the most common legal issues that businesses could face.

Business Formation

What happens during initial business formation can follow the life of your company in not-so desired ways. If you have a business partner, it is important to clearly document rights and responsibilities. There should be a shareholders or partners agreement in place that outlines the expectation in time, effort and capital for each partner. Additionally, the agreement should explain what happens of one partner leaves or dies. There are legal guidelines for how the deceased partner’s stocks and interest should be handled.

Most state laws hold partners jointly liable for debts and obligations when the business is formed as a general partnership. All of your investment in the business is at risk if there is a problem. Other legal options that come with varying levels of liability include LLCs, limited partnerships and corporations.

Failing to have a proper record keeping system could also cause problems for your company. If improper records lead to IRS tax problems, this could hinder your ability to raise capital for an expansion. This could also lead to personal liability. Make it a habit to document shareholder meetings, stock issuances and stock transfers to protect your company.

Employment Law Issues

Using employees and independent contractors can help build a business from the ground up. At the same time, this can also expose your business to issues that can hurt its growth and prosperity. Everything from discrimination to workers compensation claims can eat into profits. Protecting your business often requires guidance from a legal firm to make sure policies and procedures comply with the law. You can also have access to updates that can leave your business vulnerable to unwittingly breaking employment laws.

Disgruntled Employees

One of the most common legal headaches for any business owners is dealing with disgruntled employees. Thanks to wrongful termination laws and unions, American employees having more rights than other countries. Make sure you have carefully drafted documents for a non-performing employee to sign if you terminate their employment. Otherwise, you can leave the door wide open for a lawsuit if final termination documents are not signed.

Harassment and Employment Discrimination Cases

Harassment, whether for racism, sexual or otherwise, can become a serious problems. The workplace is becoming more integrated with employees from various religious and ethnic backgrounds, and social classes. Generally, your managers have a better chance to police these issues by holding regular staff meetings. Any transgression should be eliminated quickly according to the company’s harassment policy. In many cases, this will include terminating the offending employee.

One way to avoid a potential discrimination lawsuit is to maintain records of all applicants’ resumes for an open position. These records could help you disprove a discrimination claim by showing that the most qualified person was hired without regard to their age, ethnicity or gender.

Harassment and discrimination cases usually attract a lot of media attention for victims. This can hurt your company’s credibility and public image. Be proactive with these problems to avoid a drain to your legal budget and business reputation.


Expect an increase in immigration audits as the U.S. Immigration and Customs Enforcement agency plans to step up its enforcement of hiring violations. Any business found to hire undocumented workers could face fines as well as civil and/or criminal charges. What are some of the best ways to safeguard your company from hiring people who are not legally allowed to work in the country?

First, review current I-9 processes to make sure your company representative is collecting and documenting the right forms of identification. Make sure your hiring process includes background checks to identify any workers with falsified documents. Seek legal counsel to make sure you stay abreast of changes in immigration law. A surprise audit could cripple business operations if ICE finds out you have not followed legal hiring practices.

Financial Issues

Generally, you do not operate your company with the expectation that a customer will not pay invoices. Still, this happens more often than not and creates unwanted financial issues for your company. After you exhaust efforts to collect on delinquent accounts, including using a collection agency, your next step is to file a lawsuit in small claims court.

Not only could you face the possibility of filing a lawsuit, but you could also be sued by a customer or another business. Unfortunately, this can become a very costly pursuit, even if the lawsuit is not justified. Many businesses settle unjustified lawsuits because going to court could cost more than agreeing to a settlement.

Of course, the merits of your case will determine whether you should settle out of court. Your business could end up in a financial crisis unless you are prepared for this type of legal battle. Professional liability insurance could help to address certain types of lawsuits.

Having business insurance is essential to operating a successful company. Another reason to have insurance is to protect your assets and rights from criminal theft. You never know when a disaster, product defect or discrimination claim may occur.

Contractual Disagreements

Contractual disagreements can become legal issues for your company. There are instances when a client will dispute a contractual agreement they have with your company. Additionally, a business decision may require that you get out of a contract.

In either case, contracts can pose serious issues since they are legally binding. You do not want a client to simply walk away from legal obligations. Likewise, you do not want to remain in – or sign – an agreement that can hurt the success of your business. It is best to have an advanced review of contracts before signing and when negotiating a deal with a client.

When to Hire an Attorney

Like many business owners, you might be reluctant to have an ongoing relationship with a law firm. This can become a costly line item to maintain. However, the cost of failing to honor an agreement or hiring an undocumented worker also comes with significant costs. Having an attorney is often necessary to help you avoid – or overcome – legal proceedings successfully.

Nevertheless, not everything that your company does may require legal help. For example, hiring a new employee typically involves a lot of paperwork that does not equal expensive. Once you make sure the I-9 process is accurate and job descriptions are correct, you can rely on the HR staff to handle the hiring process.

In addition, you might need to hire an attorney to handle collection issues. Initially, you could tackle the steps of contacting customers and save on an expensive legal bill. Someone in your accounting department can make calls on delinquent accounts.

They can ask about payment status and set up a payment agreement if necessary. A follow-up letter confirming the payment agreement should be sent to the customer. Some customers forget or wait until they receive a call before paying an invoice.

If you wait too long to collect, you may need legal assistance to put your accounts receivable in the black. An attorney can write letters to delinquent customers when debts remain unpaid after an extended period.


Mistakes are often a natural part of the business cycle. Regardless to the type of business you have, the policies you implement and people you employ, you could face a legal issue for one reason or another. Unfortunately, ignorance is not a defense when it comes to following the law. You can put your company at a greater advantage by understanding common legal issues and doing what is necessary to avoid a negative outcome.