Top 10 Legal Mistakes New Business Owners Make - 66

This is Creative Counsel, episode 66: The top 10 legal mistakes that new business owners make. Welcome to Creative Counsel with Brittany Ratel. I'm your host Brittany, an attorney for creatives who believes in solid contracts and cute office supplies, and who wants to empower you to be a more confident business owner. Whether you're a creative, influencer, maker, artist, shop owner, or content creator, you are not just a blank. You are a real bona fide business owner. So let's help you own your business and get you legally legit Britt. Hi, I'm Brittany Ratelle, and I'm an attorney for creatives, creators, modern entrepreneurs, and I'm so excited to be talking to you today and to be sharing with you my top 10 legal mistakes that new business owners make. I get the position and the privilege of sitting where I am and helping a lot of new business owners, especially people who are in the creative industry, and getting to see them grow their businesses, start their businesses, and scale them. And there's so many things that they do great and wonderful, and we want to celebrate that. But we also wanna go in with eyes wide open and recognize that there can be a lot that's really overwhelming with starting a new business and a lot of common mistakes that people make simply because it's a new thing. So first thing off the bat is I just wanna say, I don't want to add or interject any shame in this discussion. I don't think there's any reason why anyone should ever think that they have a dumb question. There are no dumb questions. There is only, the only thing that's dumb is not asking a question when you don't know how to do something or you want some more guidance or perspective or clarity around something. So that's number one. The second is that when I start wading into talking about legal stuff, whenever I host workshops and seminars, I make people say this mantra and it's a little hokey, I know, but I think it was really helpful. And it is, I will not be overwhelmed by this. I simply know more than I did before. My point here is that as we wade into how to set up a business and the alphabet soup that is registration and incorporation and setting up contracts and hiring and getting the next thing, it can really seem heavy and overwhelming to the point where like, I just kind of want to put my head in the sand. I don't want to deal with any of this. Maybe this isn't worth it. Maybe I'm just not cut out for this. And all of those are lies. Okay. And they're not helpful lies either. And they allow us to maybe sit in that realm of being overwhelmed or confused instead of saying, well, that's not a state that I want to stay in. I don't believe that I need to stay there. And I know that I have access to tools and then I can move forward with, you know, or even change the self-talk from I don't know how to do that yet. I don't know how to hire someone yet, but I'm going to learn how because certainly everything is, you know, figureoutable and legal is no exception to that. So, okay, those are my two kind of cautionary tales, framing messages. So let's get to it. Let's talk about the top 10 legal mistakes that new business owners make. Number 1, they don't research their name. They don't do a trademark search. The reason why this is such a problem is that I see people all too often getting and using a name in their business that's just something they like. It's the name of their kid or their pet, or it's a natural part. It kind of just describes what they do. Sometimes people even, you know, they love a name and go a step further in their process is that they look and see if the domain is available or even pay for a domain because because they just love the name so much, or they look to see if social media handles are available. And because they love that name and they want to secure that. Now, those are good steps. Those are things that should happen if you love the name of your business. However, you can't stop there. Okay? And the reason why is that those things are not a trademark. Okay? A trademark is the use of a name to indicate the source indicator of a product or service. Okay? That's a legal definition. I know, because I'm a lawyer. That's what we do is we give legal definitions. But the point is, is that a trademark gives confidence and clarity to your customers that they know what they're purchasing and that the things that are used as trademarks, like an overall brand name, like a logo, like coloring of packaging, like slogans, like a product name, those are all distinct and different enough so that they know what they're purchasing. You're not allowed to make something look like a can of Coca-Cola because that would be trademark infringement. You're, you're making something look like their brand so that you can dupe customers. Okay? And trademark law is all about protecting customers. Do brands use trademarks strategically? Yes, they do. Are some trademark portfolios and brand portfolios the most important asset to a company and worth, you know, hundreds of millions of dollars? Yes, they are. So it's something to take seriously. Okay? So, you know, I teach this in a bunch of different places, but basically when you're looking at the name of your business, you want to do a really thorough Google search. And also you also wanna do a search of the trademark search database called TESS system, T-E-S-S. But if you Google trademark search database, look for the.gov, you're gonna find it. Word of caution here, this database is '90s ghetto Boolean operators. So it means it takes a little bit of a learning curve to work it correctly, and it gives a lot of false clearances, meaning if you put in Starbucks with two S's, it's going to show you that there are zero search results, there are zero conflicts. Obviously, that's not true. Starbucks with two S's at the end would be a terrible name for you to start as a brand. And so I do caution that if you're— you really love a brand name, and especially if you are willing and ready or have already invested money, in branding, in a beautiful website, in packaging, you know, all the things, the stickers, whatnot, you know, custom mailers, please, please, please go and work with a trademark attorney, myself or another venerable colleague, and get some help making sure that your brand protection strategy is solid and set up and that you have not already set yourself up for disaster for getting that cease and desist and having to have to rebrand or, you know, destroy inventory or give up some of your profits. And that you just feel hamstrung because already you have doors closing. You can't pivot. You know, you were in clothing, but now you can't sell blankets because someone else is in blankets and you didn't know that at the beginning. You wish you would've known that. Okay? We wanna avoid those. I wish I would've known conversations. So please do not launch a brand name. Do not have a name of your company without doing a trademark search, number 1. Okay? Number 2 is that we need to be using contracts. Okay. So that's the biggest mistake I see. Number 2, I mean, shocker that an attorney loves, loves, loves a good contract. Love, love, love that agreement. You know, get it in writing. It's simple, easy. Says easy, does hard. I get it because contracts make things complicated. They slow the process down. You have to have people think about things and read through it. That's the point. We want people to have really clear expectations on who is doing what, when, you know, all of the obvious stuff that you feel like needs to be answered in terms of an arrangement with somebody else. And here's the thing. We want to talk about what people don't think about talking about. What happens when the unexpected happens? What happens when the gig is canceled? When we don't end up doing the event? What happens when someone gets sick and can't show up? What happens if someone uses some intellectual property they're not supposed to? What happens if someone doesn't pay on time? What happens? You see how we— most people don't talk about those things unless they're prompted to in a contract. That's why contracts are awesome. Get it in writing. Make the contract be the bad guy. Okay? Especially if you have a little bit of a conflict-avoidant personality. And, you know, it's not that you don't trust your person on the other side that you are negotiating with and setting up things with. It's that human brains remember stuff differently. Okay? And we don't have computer brains that remember everything. Our conversations are colored by our own experience, what happens before and after. So we use written documents, okay? And we used to use, you know, papyrus and vellum and fancy quills. And now electronic documents are completely fine. Electronic signatures, completely enforceable. And that's great. So make it easy part of your process, but make it part of your process, okay? So that's number 2, use contracts, okay? The big mistake is not using them. Okay, number 3, top other mistake is people don't set up their LLC. Okay, they don't incorporate or they don't register their business entity. These are all— we're using these all interchangeably. We'll talk a little bit about that. So if you have not set up anything, the default status is that you are a sole proprietor. Okay, that's like the Times New Roman font. If you do nothing, you just, you know, if you set up a new Word document, it's Times New Roman. You don't have to do anything, it just happens. You just start selling stuff, anything, anywhere. You're a sole proprietor. Yay. That's what your state thinks you are. That's what the IRS thinks you are. That's fine. But you have no legal protection. There is no boundary between your money and your money that's in your house, your bank account, what you own with your spouse, what's in your 401(k), your vacation fund, your car. All of that is mixed. Mixed and commingled— commingled, such a fun word— with your business money. Okay, that means that you just have one bucket. So if a huge wave comes and knocks over that bucket, you're toast. Okay, everything in that bucket is now available. So the other analogy I like to use here is, you know, on the Titanic, how they had those engine rooms. When it flooded, they could pull down the doors. That engine room could flood. That's a bummer. But it was limited to that room. It couldn't touch anything else. Okay? That's what you want your LLC to be. LLC is a limited liability company. It protects it. So if you were to get sued, if there were going to be any kind of claim or drama with your company, at the worst that could happen is it would protect— something could happen with the money that's in that company, but everything else is off the table. Okay? You have boundaries. Boundaries are hot right now. Okay? So let's put up some business boundaries. Register your LLC. Okay, corporations are fine, but they're more money and they're more work. And so most people, for most circumstances, an LLC is flexible, cheaper, easier to maintain, harder to mess up. And once you start making enough money that you're paying yourself like a reasonable salary, you can switch. You can stay as an LLC but be taxed as a corporation. This is called an S corp. It's a tax designation. You've probably heard your fancier business friends talk about it who've been involved in their business and who are making bank. So if you heard about an S corp and are worried, what is an S corp? Should I be an S corp? It's a tax designation. You actually are an LLC, but you're taxed on the corporate level. And you should talk to your accountant about that. And they will let you know when it makes sense by running your numbers because there are some additional fees, but there's also a lot of great benefits for that. Okay. So please set up your LLC. Yes. Can you do this yourself? Yes. Yes. Can you hire attorneys to do this? Yes. Should you use LegalZoom? No, no, you shouldn't. See, I set yourself, yourself up for that. The reason why I don't like the online form fillers is because a lot of them rip you off. I mean, they all rip you off because you can do this yourself. You can fill out the online form for your state and just pay your filing fee. You don't need to pay a middleman. And they usually hose you and have you sign up, pay too much for a registered agent. They want you to have like the fancy, you know, binder and stamp kit. They charge you for a lot of other you know, little trinkets in there that you don't actually need. And so it ends up costing you way more, and they usually lock you into some sort of service plan that can be very difficult to get out of. So a lot of 1-star, very angry people, 1-star Yelp reviews because of that. So I don't love them because of that. Okay, so do it yourself or hire someone else, but get it done. Get your LLC done. Okay, number 4, using other people's content. Not okay. Not okay. If you didn't create it, You can't use it. Okay. What about if I give credit? Not okay. We're not— this is not a book report. We're not in high school where you can just give, you know, attribute. The academic scholarly world treats this differently. Okay. It's okay for you to use other sources with attribution. That's considered fine. When you run a business, you can't use other people's content. You can't use their photography, their illustrations, their audio, their video. Their blog posts, you can't just rip those off, their ebooks, their online courses, you can't use other people's stuff. And as a creator, you should get this, you know, that, that's a bummer. You should respect content creation, how much time and effort goes into that. So please be a good example and call it out when you see it and make sure and use it as a civil learning opportunity if people take your stuff to be like, hey, don't know if you know, That's not okay. All right. It's not to take someone else's stuff. If something is truly royalty-free, then yes, you can use it. That includes things in the public domain. That includes any works published before 1926 are now in the public domain. Woo! So if you are looking at some snazzy 1915 photography, have at it. You can do it. It's totally available. But if you go on to some sketchy websites and— or they don't even look that sketchy— and it claims to be royalty-free, I would make sure you really trust that website, that it is royalty-free, because there have been instances, and I've helped clients with this, where they used a photo, they thought it was royalty-free. It wasn't. Okay? They got a cease and desist and a bill from a stock photography company and their attorneys, junkyard attorneys, copyright trolls. This is all they do is go and look for when people have used photographs that they haven't used. Okay? There are companies out there that do this. Hey, me. And they will try to shake you down for a lot of money. Please do not pay all that money. Please talk to me and we'll negotiate that way down. But yeah, is it scary? Yes, it is. So don't use other people's stuff. Just don't. Even be careful with murals, public art. That's become a bigger deal. That's still someone else's artwork and they have the right to publicly to photograph it and what can be done with the photograph. This has even come up with like people having art in their home and then they get like headshots in front of cool art. So just when you're using something for business, the rules are different. And if you, by using this picture and using this content, is hurting the sales of the original, it's likely that it's copyright infringement and you don't have fair use. Okay? So it's not gonna happen. It doesn't mean what you think it means, plethora. Okay, number 5, number 5, taxes. Okay? In terms of mistakes, new business owners, they don't pay taxes. They don't, they don't save money for taxes. They don't collect sales tax if they're selling physical product or even digital products. In some localities, this is changing. I recommend that you look at TaxJar or Avalara, are great websites where they have like compliance software that helps people with their tax, sales tax burdens, because that stuff is like shifting dune sand that's changing all the time. Save money for taxes. I am not a CPA. I'm not an accountant. However, I do play one on TV. No, I don't. But as I recommend, read Profit First by Michael Michalowicz. Great, great book about setting up good cash flow systems for a small business to be profitable. And save money for taxes. Assume that of the money that you make, you should be saving around 25% to 30%. If you're doing that and stashing that away in a different account and then paying it quarterly as you need to, once you start making decent money, then you won't be surprised and you won't be hating your life and you won't be in the cycle that a lot of business owners find themselves, which is they're constantly playing catch-up. They're paying off last year's taxes and having to make money to pay off the tax burden. They're not— they can't ever get ahead of it. So don't put yourself in that position. Don't be surprised that taxes will be due. If you're making money, you have to pay taxes on that. And even if no one has told you yet, I'm telling you right now. So save, save the money and pay it. And then when you have to write that check, it's not that big of a deal. I mean, does it suck? Yes, of course it sucks. Of course. Yeah. You know, it goes without saying. One little tip: put something, find something on your state website or the federal website that you are actually genuinely excited to support. Find an education project, a health initiative, you know, foreign policy thing, aid program. Write that on your memo line and think about my money is paying for that because it is in a way. So maybe that helps soothe that hurt just a little bit. Okay. All right. So that's number 5. Pay taxes. Pay and plan on paying taxes. Pay sales tax, pay state tax, pay federal tax. Number 6, the mistakes of new business owners make, they don't set up an operating agreement. Also called a partnership agreement or a shareholder agreement or a founders agreement. We're talking about the same thing. This is a business prenup. We want prenup. We want prenup. And yes, I ain't saying she's a gold digger, but I am saying that if you don't have something in writing, your best friend may not be your best friend forever. Okay? This business might kill your friendship. That's what happens when you don't have a business prenup. You don't have that slightly awkward conversation of what is everyone doing in the business and how much do we own equity in the business and who's putting money in and how are we taking money out and what happens when someone wants to walk? Really important to talk about that. What's your exit plan? What's your succession plan for your business? So these are called operating agreements when you're an LLC. When you have a corporation, they're called shareholder agreement or share agreement. You need to have it. It needs to be in writing. It's not filed with anyone anywhere, but it is legally binding because you both sign it. And I sell these on my website. So along with most of the other contracts that I talk about here today. So if you need one of these, go get it on creativecontracts.co. Fill it out. I also have an awesome podcast episode. If you're listening on the podcast, it's episode 45, is Everything Partnerships, and it's all about kind of the big questions that you should you walking through each other as you're having this conversation about working with each other. It goes from everything from the woo-woo vision planning, same page, to things like the nitty-gritty of equity splits and talking about non-compete, building email lists and customer lists. Who gets to have that? Does anyone get to have that? Do you get to leave with that? All of that stuff. So please, please don't put this off. Please do this sooner rather than later. I've seen so many businesses, so many relationships ruined, especially if you are running a business with family, with friends. You need to have this agreement to protect that relationship, to make sure that it's— again, make the agreement be the bad guy. You had it in writing, like, oh, is that what we decided? I guess it is because here it is. See how much better that is than it being your word and I have a problem with you. Doesn't go over very well. People get defensive. Shocker. Okay, so number 6, business prenup, operating agreement, make it happen. Okay, number 7 mistake, people don't have their website policies. They have naked footers. Okay, means the footer of their website is naked. There's nothing on it. They are running around the internet streaking, you know, just like Will Ferrell in Old School. And as good as everyone loves a good streak, it's not cool. Not when you're running a business, it's not compliant. You are in breach of state and federal privacy law, and you are risking yourself in terms of if you get a chargeback, you don't have anything to defend yourself. If you have people steal your content, there's no first line of defense for copyright because you don't have anything about that. Where's your refund policy? Where's your shipping policy? Where is your, I didn't, you know, I bought your coaching program and I didn't make a million dollars, so I want all my money back. So That's, that's what you want. You want all that stuff in your footer. I also sell this one. It's called my Website Legal Bundle. It's everything you need to be in your footer, your privacy policy, your terms and conditions, and then any disclaimers or disclosures that are necessary based on what you sell, on what you talk about on your website, and then your cute little copyright statement that should be in your footer. So sell all of that, nice neat bundle, Website Legal Bundle. Okay, go look for the links. They'll be there. Okay, number 8. A mistake is you don't have a lawyer read through your contracts, i.e., you don't know what you're reading or you're signing. And this happens a lot. You know, you probably can't believe how many conversations I've had with people of like, I know I really should have had someone. I knew that, but like, I didn't. And there's lots of reasons why, you know, people can be really flattered, especially when they're presented with a really big project, you know, your first big you know, collaboration with somebody, or it's a book deal, or it's, you know, a signing up with an agent, or, you know, all kinds of those big first contracts, licensing agreement, you know, for merch or whatever. And those are all exciting opportunities. And again, the reason why we want help in reading and advising us, negotiating that contract, is not because we don't trust people. It's because we are— want to be informed business owners, empowered business owners. We want to have our own back. And we want to understand what we're signing and make sure that the discussions that we've had beforehand, especially in person, the deliberations, what we've had through email, that this is what is matched in this final agreement. Sometimes it doesn't, and it's not even that the other side is trying to be a meanie or be malicious. They're just using a standard form contract that they got forever ago from some attorney or fell off the truck on the internet. That sometimes happens, and they don't even know what's inside of it. Like, you guys talk here and agree this, But the agreement— but the contract you signed says this. Do you understand why that's a problem? And so you want to make sure that you have things to protect you there so that you guys are all on the same page. So make sure you have that into place. Okay? Make sure you understand what you're signing. Understand that it's very rare that by negotiating an agreement that you kill a deal. Okay? People expect to have contracts negotiated. That's normal. And even if someone sends you a PDF and you're like, well, I don't know what to do with this, ask for an editable document or go online. There's free tools. You can say PDF to Word converter tool, and you can turn an agreement into something that you can actually edit and redline. That's totally fine. Okay, let's talk about number 8. Sorry, that was number 8. Let's talk about number 9. People don't use NDAs when sharing confidential business information. Okay? NDA stands for non-disclosure agreements. This is one that a lot of people are fairly, you know, they're fairly comfortable with, they've seen before, they've signed one before. So I will say there is a proper degree of confidentiality when you're talking about kind of the secret sauce in your business that you should have. But also I've seen people err to a side on the, you know, keeping everything locked down where they don't talk about their business, they don't run focus groups, they don't talk about it and get feedback from people. They don't start sharing and kind of doing market testing. I am a favor of all those things. And I think you should be getting feedback from your business. Because yes, are your business ideas important? And yes, should you have a good expectation, especially if you're going into great detail and thought, you know, if you're, if you're shopping for someone to be the web developer, or develop your mobile app, should you sign an NDA beforehand before you tell them the entire vision and all the things you need and spell out the, you know, from A to Z. Yeah, that's appropriate to have them sign an NDA. Is a, you know, business idea worth a lot without the execution? Not, it's not. The execution is really where people make, usually make your money. And that's where the real value is. You know, people have ideas all the time, but they don't take action on it. And I hear from people like, I had that idea 10 years ago. Yeah, but did you do anything with it? The muse, like, you know, hit you, but did you do anything else with that idea? If it just like sat in your brain, doesn't really help anybody. That's not, that's not too impressive. So make sure you have, you know, NDAs are great and you should have NDA-like language or confidentiality language in people that you're gonna be sharing stuff behind the scenes. So if you're hiring a freelancer or a consultant or coach, make sure that there's confidentiality there. If you're hiring an independent contractor, did you work for your business? There should be NDA language in your agreement. Also, there should be work-for-hire language. That's another really big thing that I don't see is people don't have, and without that, the cool stuff that they've created actually belongs to them. Those rights have not been properly transferred to you. So you wanna make sure that that's really clear. So, and, you know, make sure that you have other intellectual property things in place. Use copyrights, use trademarks,. And then contracts or NDAs are the kind of the right vehicle to kind of protect the other stuff that you can't. Things like recipes can't actually be protected by any of those other tools. So contracts are the way to safeguard those trade secrets, which to keep them secret, you have to treat them as special and secret. That's the strongest way to do that. Okay. Number 10, guys, we're here at the end. Okay. The number 10 of legal mistakes that new business owners make. They don't hire any legal help because if they did that, they could probably avoid all of these other ones, 1 through 9. Okay. So, and the deal here is that there's a healthy place in the middle of how we want to approach risk in our business. Okay. And I've helped hundreds of entrepreneurs in various stages of starting their companies. So I feel like I'm in a good place where I can talk about this. There are, we want to be healthy in the middle. There are some people who live on one extreme who are like, I want all my ducks in a row. I want everything protected. I don't want anyone to be able to steal my stuff and content. We can do some things, we can't do everything there. I want the name to be researched and protected at all before I even launch a thing with it. I want everyone to be under contract, you know, this. And they're a little too gung-heavy, a little too gung-ho rather on protecting everything at the expense expense of being nimble, flexible, testing the market. They trademark stuff before they even know if they like the name or if the viewers and audience likes the name. You have to have a little bit of that flexibility in. Okay, so those are like my nervous Nellies. All right. They don't want to do anything until they know the end from the beginning. Spoiler alert, business doesn't work like that. Owning a business, it's going to be like this, ups and downs. You got to ride the roller coaster, enjoy it. Know that's part of the journey. Any other trite clichés we can throw in there. But know that you're never gonna be able to prepare for every bump in the road. It's all about how you're gonna respond to that. Okay? So we don't wanna be nervous Nellie. We also don't wanna be, you know, I call these people my base jumpers. These entrepreneurs, these cats don't do any forethought. You know, we're concerned about their general level of executive functioning, meaning, you know, do they judge decisions? They jump in there, they launch, They throw parties without having anything in writing. They sign agreements that they have no idea what's in them. They order 20,000 of something before they've even researched the name. Like, these people are goers and doers, and they have so much action and passion, and they're awesome, and we need some of that in the world, but we maybe don't need that much of it. Again, we want to have that healthy place in the middle where we are treating legal more like a chiropractor or going to the massage therapist. It's something we should do and check in regularly, and that way we keep a nice straight spine and we know what we're doing and we feel good rather than ER visit. And my BASE jumpers, as you would assume, end up in the ER more often. Okay. And when they do, it's more expensive. It's way more expensive. It's way more hassle and drama, and they lose sleep and they lose friendships and they lose businesses over it. Okay. We want to avoid that. Okay. And it— there is a way, there is a path. Again, it's that being more in the middle place where we are treating legal appropriately. We are understanding that it is part of doing business. And no, no one likes buying insurance or legal or tires. And yet, do we need all these things? Yes, we do. And so there's a way that we can approach it and make it feasible and part of our business process and our business strategies. But we just need to be thoughtful about that. Okay. Alright, guys, these are the 10 mistakes that new business owners make. I hope these are helpful for you to kind of avoid some of these common legal pitfalls. Thanks so much for tuning in today and listening to me. If you're interested in having more information, you can find me more at my podcast at Creative Counsel, anywhere that my podcast is, or you can find me at YouTube at the same. And I'm always interested in connecting with you guys on Instagram. That's where I love to to connect with creatives, creators, and entrepreneurs who are doing all kinds of fun, awesome things online. And remember that if you're interested in any of the contract templates that I've mentioned today, you'll find those links here, but you can also head to creativecontracts.co and that's where you can find any of those documents that are fully customizable, color-coded, editable, make it easy. And they all come with training like this, where I will walk through exactly what the agreements are and what each of the clauses mean, because my goal is to make you a more confident business owner. Okay, thanks so much for joining me today.