I recently read a blurb in Staffing Talk’s Staffing News Of The Day that while small business owners are increasingly optimistic about the prospect for growth this year, many are mindful of additional legal risks they may encounter as their businesses grow. Since the U.S. Small Business Administration estimates that companies with fewer than 50 employees generated 65% of the new jobs in this country over the past decade-and-a-half, I thought this subject was worth devoting a little more time and space to.
Rocket Lawyer’s new survey uncovers challenges that concern small business owners.
When asked about the hardest part of running a small business, 29% of those company owners surveyed say it’s dealing with legal issues.
This outranks other responses including managing profit, at 26%, and staying ahead of the competition at 19%.
Specifically, here are the Top Five legal areas identified in the survey as of most concern:
- Contract negotiations
- Real estate transactions
- Corporate compliance
- Debt collection
- Incorporation issues
These issues come into play as businesses enter into new contracts, hire new employees while staying compliant with HR and employment laws and also upgrade to new office space.
“As small business owners take bigger risks and start spending again to capitalize on new opportunities, staying on top of potential legal issues is more important than ever,” says Charley Moore, executive chairman of Rocket Lawyer. “Adapting from a mindset of preservation to one of growth means business owners have to be aware of their legal opportunities as well as risks.”
Rocket Lawyer suggests a trio of strategies that can help small business owners mitigate their legal risk(s).
1. Avoiding IRS red flags can help small businesses steer clear of a tax audit. Even though relatively few small businesses were audited last year (1% of corporations with less than $10 million in revenue were audited last year according to the IRS), the Rocket Lawyer survey found that a significant portion of small businesses (40%) say that they are more fearful of an IRS audit than any other legal issue.
“As small business owners take bigger risks and start spending again to capitalize on new opportunities, staying on top of potential legal issues is more important than ever.”
Common red flags include misclassifying employees as independent contractors and declaring higher than average business related meal and entertainment expenses, among others.
2. Learning contract negotiating skills is a must for small business owners. Tax audits cause a significant amount of trepidation, but they aren’t the most common legal issue faced by small business owners. According to the survey, out of the 52% of small business owners who faced legal complications in 2011, the most common problem concerned contracts, and more specifically, failure to collect money that was owed.
3. Document, document, document. Of any small business ownership group, staffing company owners are probably among the most diligent when it comes to documenting and putting in writing things such as employment agreements, independent contractor agreements, nondisclosure agreements, and the rest, but here’s your friendly reminder. If there’s any doubt, the agreement should be on paper with both parties’ signatures. A verbal agreement is very hard to prove in a court of law, so having a written agreement is an inexpensive way for small business owners to avoid legal hassle
Is there anything in the survey that you think got left out? What legal issues have tripped you up in the past? Do you agree with the main findings of the survey that a fairly significant number of small business owners find legal issues to be an impediment or obstacle to growth? We’d love to hear from you.
{ 5 comments… read them below or add one }
Your list is on the mark David but I disagree with your point (#3) that staffing owners exercise extreme diligence with employment agreements at least as far their internal staff goes.
They should, but being mostly smaller, highly entrepreneurial businesses, they don’t.
And the largest ones…well you’ve been writing quite a lot about them…
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Busted. Yes, Gregg, I was trying to give small staffing companies the benefit of the doubt here, and maybe it’s an aspirational thing that they should be documenting everything. You are right about that not being the case of small businesses in general, and obviously you would know better than me how true it is of smaller staffing companies specifically. Anyone care to refute this, and document the story of how your staffing company diligently documents employment agreements and such?
I agree that a “fairly significant number of small business owners find legal issues to be an impediment or obstacle to growth.” They believe that it will cost them an arm and leg just to get up and running not to mention proper upkeep. So they skimp, hoping not to get audited or caught up in anything. Many look at legal services as a luxury they can’t afford. Their business suffers from that mentality. I can not agree with #3 any more – do document! document! document! and get your employees in the habit of documenting as well. I don’t understand why they don’t especially those that have Tempworks. As I understand it, it’s as easy as pulling up the person or company, typing into a screen and saving. When you document, be smart about it. Did you know that if you document in your diary and take that to court for reference that the entire thing that you are referencing from will be subject to court review? Only take in with you to court what you want to be looked at. Furthermore – hire a paralegal! That paralegal can help keep you in line for a fraction of the cost. That’s not to say that you won’t need an attorney for other things but having a paralegal will significantly reduce those attorney fees. If you get lucky, that paralegal will be able to help with HR policies and other aspects of business. Ours helps us with social media when he’s not busy with legal work! The staffing companies that I have worked with work in the here and now and we will get to that later when we have time mentality but the thing with staffing is it is always on the go and that stretch of down time business owners plan for isn’t the way to plan. Really, how many of them have actually worked in the office and understand the fast paced environment that is staffing? Down time? Get it done right and get it done early on and avoid the headaches of legal backlash! Legal barriers are not inhibiting expansion. It is more likely that business owners with their lack of knowledge, planning and forward approaches are in fact their greatest barriers.
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It’s hard to stay on top of it all. Sure your advice sounds great but with limited funds and time that’s not always realistic.
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Chris makes some very valid points. Owners of small staffing companies should find and develop a relationship with an attorney that either understands the staffing industry or is willing to learn and have that attorney/firm on retainer for all legal questions. When the business grows enough, the staffing company can then consider whether it pays to hire in-house counsel. The benefits of at least having outside counsel on retainer are invaluable–and can save the staffing firm untold amounts of money in legal fees, settlements, fines, etc. It also allows the owners and executive management to focus on what they are good at—growing their business while outside/inside counsel does what they do best.
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