5 Legal Mistakes Small Business Owners Make and How to Avoid Them

Running a small business in Michigan is no small task. Whether you're managing a retail shop in Grand Rapids, leading a service business in Lansing, or consulting from your home office in Detroit, you're constantly juggling responsibilities (clients, operations, finances, and everything in between). With so much on your plate, it’s easy to overlook legal details that can later become serious problems.

Here are five of the most common legal mistakes we see small business owners make, along with some straightforward ways to avoid them.

1. Skipping Contracts or Using Generic Ones

Many business owners rely on handshake agreements or download contract templates from the internet. While those might work temporarily, they often lack the details needed to protect your interests if things go sideways.

A contract should clearly outline expectations, responsibilities, timelines, and payment terms. Without that clarity, you risk disputes, confusion, and even litigation.

What to do: Use written contracts for all meaningful business agreements. Be specific. Tailor your contracts to the particular situation and ensure they comply with Michigan law. If you’re unsure, consult a business attorney to help draft or review your standard agreements.

2. Overlooking Compliance Requirements

Compliance may not be the most exciting part of running a business, but it’s essential. Missing license renewals, forgetting to file an annual report, or not registering for the right taxes can result in fines, penalties, or administrative shutdowns.

What to do: Identify all federal, state, and local regulations that apply to your business. Set reminders for filing deadlines and license renewals. As your business evolves, make sure your compliance obligations are still being met. A quick annual review with your attorney or accountant can help you stay ahead.

3. Choosing the Wrong Business Structure

Starting as a sole proprietor is common because it’s simple, but it may not be the best option in the long run. Without a formal business structure, your personal assets may be at risk if your business encounters legal or financial difficulties.

Some business owners form LLCs or corporations but fail to maintain the proper documentation, separate bank accounts, and required filings, thereby undermining the very protection the structure offers.

What to do: Review your current structure with a legal or financial professional. An LLC is often a good fit for small businesses, offering liability protection and flexibility, but the right choice depends on your specific circumstances. Reassess your structure if your business is growing, adding partners, or taking on more risk.

4. Misclassifying Workers

Employment law is complex, and even well-meaning mistakes can be costly. One of the most common missteps is treating employees as independent contractors to save on payroll taxes. Unfortunately, if the worker is legally classified as an employee, misclassification can result in significant back pay, penalties, and legal exposure.

There are also rules governing overtime, record-keeping, discrimination, and required workplace notices, even for businesses with only one or two employees.

What to do: Learn the basics of state and federal employment law. When hiring, ensure that workers are classified correctly, use standardized offer letters, and implement clear workplace policies. If you’re unsure, seek advice before making employment decisions. A little guidance upfront can prevent significant problems later.

5. Relying on Verbal Agreements

It’s common to make informal deals with vendors, clients, or even business partners, especially when there’s a high level of trust. But when things change or a disagreement arises, verbal agreements can be difficult (or impossible) to enforce.

People forget details. Assumptions are made. Without documentation, you may end up in a “your word versus theirs” situation with no clear path to resolution.

What to do: Document your business agreements. Even a simple written summary in an email is better than nothing. Ideally, use a brief contract that outlines the terms, responsibilities, and payment details. A written agreement protects both parties and reduces the chance of miscommunication.

Final Thoughts

Legal issues might not be top of mind when you're focused on serving customers and growing your business but ignoring them can lead to serious challenges. The good news? These common mistakes are all avoidable with a bit of planning and the proper support.

If any of these issues sound familiar, don’t panic, you’re not alone, and it’s never too late to address them. Our Michigan-based law firm works with small business owners every day to help them build a solid legal foundation.

If you have questions or want to make sure your business is legally sound, we’re here to help. Reach out to Jabbour Law; we’d be glad to discuss your goals and offer guidance tailored to your specific situation.