Running a Business Means Managing Risk – Especially Legal Risk
Running a business always entails a certain level of risk. Any good business owner knows that it is important to understand those risks and take the necessary steps to minimize them in order to succeed and endure.
While there are many types of risk that a business may face, legal risks are arguably among the most impactful and most often overlooked.
The following six legal risks are surprisingly common and, if not handled properly, can lead to high costs or penalties, lost opportunities, and even the closure of a business. Taking proactive legal measures is the only way to safeguard your assets and ensure long-term stability.
Top 6 Legal Risks Your Business Might Be Ignoring
To successfully navigate the complex regulatory environment, business leaders must acknowledge the most frequent legal pitfalls. Here are the six primary areas where legal exposure is high:
Regulatory Trouble: Falling Out of Compliance
Employment Law Issues: From Hiring to Firing
Tax Time Terrors: Payroll and Filing Mistakes
The Wrong Entity: Choosing an Inadequate Business Structure
Contract Disasters: Poorly Drafted or Missing Agreements
Premises Liability: When Injury Claims Hit Your Business
1. Regulatory Trouble: Falling Out of Compliance
In the modern business environment, non-compliance with legal and industry regulations is not just a violation, it is a direct threat to the survival of your business that can lead to immediate closure and severe penalties.
What Is Regulatory Compliance and Why Is It Used?
Virtually every business is subject to some type of government regulation, ranging from industry-specific licensing (e.g., finance, food service, healthcare) to general laws concerning environmental impact, consumer protection, and data privacy (like Shield Act or CCPA).
Regulatory compliance is the process of ensuring your business adheres to all relevant laws and standards. Failure to comply can result in administrative investigations, suspension of operating licenses, and devastating fines.
When Does Regulatory Risk Become Acute?
Regulatory risk is acute in several key operational moments:
Situation | Why Proactive Compliance is Essential |
|---|---|
Expansion into New Territories | New states or countries mean entirely new sets of local, state, and national regulations that must be met before launching operations. |
Handling Sensitive Data | If your business collects, stores, or processes customer data, credit card information, or health records, the risk of violating stringent data protection laws is constant. |
New Industry Standards | Industry regulations (e.g., OSHA for worker safety, EPA for waste) are constantly updated. Ignoring these changes can lead to immediate violations. |
Common Hidden Risks in Compliance
Compliance risk is often hidden because business owners focus only on the most obvious regulations:
Internal Enforcement Failure: Having policies written down but failing to train employees or enforce them consistently.
Outdated Policies: Relying on compliance documents or training materials that have not been updated since new laws were passed.
Vendor Non-Compliance: Assuming your third-party software, data storage, or manufacturing partners are compliant, which can expose you to liability if they fail an audit.
How to Spot and Avoid Compliance Traps
Addressing these issues up front before they become problematic and coming up with a plan on how to ensure your business is always in compliance is a great way to avoid complications:
Establish a Compliance Calendar: Implement a system to track all licensing renewals, mandatory filings, and regulatory deadlines.
Designate a Responsible Party: Assign a specific manager to monitor changes in law related to your industry and operations.
Conduct Annual Audits: Hire outside counsel or compliance experts to perform a third-party audit of your current operations and identify gaps.
2. Employment Law Issues: From Hiring to Firing
Employees are the heart of every business, but interacting with them carries the widest range of legal pitfalls, as failure to respect employee rights can lead to expensive lawsuits for discrimination or misclassification.
What Is Employment Law and Why Is It a Major Risk?
Having employees is important for most types of businesses, but it also exposes you to many kinds of risk. Employment law is vast and constantly changing, covering non-discrimination, wage and hour rules (overtime, breaks), paid leave entitlements, worker classification (employee vs. contractor), and proper documentation for disciplinary actions and termination. Employment lawsuits are often lengthy, costly, and can lead to significant reputation damage.
Common Hidden Risks in Employment Practices
Employee Misclassification: Incorrectly classifying full-time employees as independent contractors to avoid taxes and benefits, leading to massive back-pay claims and tax penalties.
Inconsistent Policies: Applying disciplinary measures or offering benefits inconsistently across different employees, which can be interpreted as discrimination.
Poor Documentation: Terminating an employee without a clear, objective paper trail of performance issues and warnings makes it difficult to defend against wrongful termination claims.
How to Spot and Avoid Employment Law Traps
Proactively dealing with these issues can help you avoid legal issues related to your employees:
Mandatory Employee Handbook: Develop a legally reviewed employee handbook that outlines all procedures, policies, and expectations, and have every employee sign an acknowledgment.
Manager Training: Provide regular training to all managers on anti-harassment policies, fair disciplinary procedures, and wage and hour rules.
Legal Review of Contracts: Have employment agreements, offer letters, and contractor agreements reviewed to ensure they meet current legal standards and clearly define roles.
3. Tax Time Terrors: Payroll and Filing Mistakes
Tax obligations are an unavoidable part of doing business, and payroll errors or delays in meeting government obligations are a direct path to astronomically expensive penalties and potential personal liability for the business owner.
What Are Tax Risks and Why Are They So Punitive?
Taxes are one of the biggest expenses that you’re going to have as a business. This risk encompasses not only filing accurate business income tax returns but also managing payroll taxes (withholding, matching), sales taxes, and various local taxes.
Tax authorities (like the IRS) are highly punitive; if mistakes are made, they can levy enormous fines, seize assets, and in severe cases, initiate a shutdown of your business.
Common Hidden Risks in Tax Filings
“Trust Fund” Penalties: Failing to deposit employee payroll taxes (which are held in trust for the government) on time. This can lead to personal liability for the business owner.
Mismanaging Sales Tax Nexus: Failing to register and remit sales tax in every state where your online or physical activities create a “nexus” (sufficient physical or economic presence).
Ignoring State Tax Requirements: Assuming state tax rules mirror federal rules, states often have unique filing requirements and tax credits that are easily missed.
How to Spot and Avoid Tax-Related Risks
Working with qualified professionals is the single most effective way to protect your business from tax risks:
Consult a CPA: Partner with a certified public accountant (CPA) who specializes in business tax law to handle all complex filings and quarterly estimates.
Use Professional Payroll Services: Outsource payroll processing to a reputable service to ensure all federal and state withholdings and deposits are handled accurately and on time.
Legal Counsel for Disputes: Having an attorney to help through existing audit problems or disputes with taxing authorities can protect you from devastating tax-related risks.
4. The Wrong Entity: Choosing an Inadequate Business Structure
The legal form of your enterprise is the foundation of protecting your assets. The wrong choice of structure or poor maintenance of formalities can destroy the shield separating your private and business finances, exposing you to personal risk.
What Is Business Structure Risk?
When starting a business, choosing the legal structure (sole proprietor, partnership, LLC, S-Corp, C-Corp, etc.) is a big decision. The type of legal structure you choose will fundamentally impact your taxes, personal liabilities, and much more.
The risk here lies in choosing a structure that exposes the owner’s personal assets to business debts (like a sole proprietorship) or failing to maintain the corporate formalities required to keep the liability shield intact.
Common Hidden Risks in Entity Management
Piercing the Corporate Veil: Failing to maintain strict separation between personal and business finances (e.g., paying personal expenses from the business account), which allows creditors to bypass the LLC or Corporate structure and sue the owner directly.
Inadequate Operating Agreement: For LLCs, a weak or non-existent operating agreement can lead to crippling partnership disputes over management, profit sharing, and buyouts.
Unnecessary Complexity: Choosing a C-Corp when a simpler LLC or S-Corp would suffice, subjecting the company to unnecessary administrative burdens or “double taxation” on profits and dividends.
How to Spot and Avoid Entity Structure Traps
Discussing your options with a skilled advisor is a great first step towards ensuring you choose the right structure for your situation:
Legal Consultation: Consult with a business law attorney before incorporating to determine the best structure for liability protection and tax efficiency.
Maintain Formalities: For all corporations and LLCs, maintain distinct bank accounts, keep accurate records of meetings (minutes), and ensure all legal documents are signed in the entity’s name, not the owner’s personal name.
Review Buy-Sell Agreements: For partnerships, establish a clear buy-sell agreement or succession plan in the operating agreement to manage partner disagreements, death, or departure.
5. Contract Disasters: Poorly Drafted or Missing Agreements
Contracts are the lifeblood of business, they define expectations, revenue, and rights. However, poorly drafted or missing agreements almost guarantee future disputes, financial loss, and contested intellectual property.
What Is Contract Risk?
Contracts are an important part of most businesses, with customers, employees, vendors, or partners. Contract risk arises when agreements are missing entirely, are too vague, or contain unfavorable clauses.
When handled correctly, contracts can be a valuable asset to your business by clearly defining rights and obligations. When mishandled, however, they can present huge risks, unanticipated costs, or loss of intellectual property rights.
Common Hidden Risks in Contract Management
Vague Scope of Work (SOW): Contracts that fail to precisely define deliverables, timelines, and acceptance criteria, leading to endless disputes over what constitutes a completed project.
Missing Termination Clauses: Agreements without clear grounds for termination, allowing a non-performing partner or customer to hold your business hostage.
IP Ownership Ambiguity: Failing to explicitly state that the business owns all Intellectual Property (IP) created by contractors or employees while working on a project, leaving ownership in question.
How to Spot and Avoid Contract Disasters
Having a properly written and signed contract is important for every significant relationship:
Use Written Agreements: Do not rely on verbal agreements for anything substantial. A basic email thread is not a contract.
Standardize Templates: Use legal counsel to create standard, compliant templates for common relationships (MSA, SOW, Vendor Agreement).
Prioritize IP Clauses: Always include a clause that clearly assigns all resulting intellectual property to your company.
Legal Review: Ensure all high-value or complex contracts are reviewed by an attorney before signing them.
6. Premises Liability: When Injury Claims Hit Your Business
If your company welcomes clients, customers, or the public onto its property, you are exposed to premises liability risk, where a single fall or accident due to unsafe conditions can cost you significant sums and damage your reputation.
What Is Premises Liability Risk?
Any company that has people coming onto its property (customers, clients, vendors, or the public) is at risk for a personal injury lawsuit, known as premises liability.
This risk covers injuries caused by unsafe conditions, inadequate maintenance, or insufficient security on the business property. These claims can come from people who have suffered a legitimate injury or, sometimes, from fraudulent actors.
Common Hidden Risks in Premises Management
Negligent Security: Failing to provide adequate security measures in high-risk locations, leading to liability if a customer is harmed by a third party.
Ignored Maintenance: Knowing about a hazard (e.g., a broken step, a leak) but failing to fix it quickly or post a clear warning sign, creating clear evidence of negligence.
Inadequate Insurance: Having insufficient Commercial General Liability (CGL) insurance limits means the business owner’s personal assets could be at risk if a large judgment exceeds the policy coverage.
How to Spot and Avoid Premises Liability Traps
Having an attorney available to represent your business will help to minimize the risk and allow you to remain focused on your business:
Regular Safety Inspections: Conduct and document weekly or monthly safety inspections of the property, addressing hazards immediately.
Display Warnings: Use clear, visible signs and barriers to warn visitors about temporary hazards (e.g., wet floors, ongoing construction).
Review Insurance Coverage: Consult with an insurance broker and your legal counsel annually to ensure your CGL policy limits are adequate for your business size and exposure.
Frequently Asked Questions (FAQ)
Question | Answer |
|---|---|
What is the most common risk for a small business? | Contract & Entity Risk. New businesses often use generic contracts or fail to maintain the separation between personal and business finances (“piercing the corporate veil”), which puts personal assets at risk. |
Are verbal agreements legally binding? | While some verbal agreements are legally binding, they are extremely difficult to prove and enforce in court. For any critical business transaction, you should always use a professionally drafted, written contract. |
How often should I review my employee handbook? | At a minimum, the handbook should be reviewed annually by legal counsel or immediately after any major change in local or federal labor law (e.g., changes to minimum wage or overtime rules). |
What is the first step to mitigate tax penalties? | The most critical step is ensuring payroll taxes are handled correctly and deposited on time. Using a reputable, specialized payroll service significantly reduces the risk of expensive “trust fund” penalties. |
Can I protect my business structure from liability? | Yes. By choosing an LLC or Corporation and strictly maintaining corporate formalities (separate bank accounts, documented meetings, signing contracts in the business’s name), you protect your personal assets. |
What is the biggest risk of regulatory non-compliance? | High Fines and Operational Shutdowns. Regulations often carry steep monetary penalties and can lead to the suspension or revocation of your license to operate, particularly in healthcare and finance. |
Protect Your Business with Crowley Law LLC
You’ve just seen how common operational blind spots, from compliance gaps and payroll errors to poorly drafted contracts and premises liability, can quietly put your business at serious risk.
Crowley Law LLC helps startups and mid-sized companies in technology and life sciences identify, prevent, and manage these risks before they turn into lawsuits, fines, or costly business interruptions. Our industry-focused approach allows us to translate legal requirements into practical, scalable protections for your growing company.
Our services include:
Risk & Compliance Audits: We examine your policies, filings, licensing, and operational processes to uncover hidden compliance exposures and deliver a clear action plan to fix them.
Employment Law Guidance: We help you navigate hiring, firing, discipline, and contractor management to avoid misclassification, inconsistent procedures, and wrongful-termination issues.
Tax & Payroll Risk Mitigation: We work with your payroll provider or CPA to tighten controls, ensure proper deposits, and help you prevent the types of errors that trigger penalties and audits.
Entity Structure & Governance Support: We help you choose and maintain the right entity and governance documents to preserve liability protection and reduce internal conflict.
Contract Drafting & Review: We draft, review, and negotiate contracts, including MSAs, SOWs, vendor agreements, and licensing deals to eliminate vague terms and reduce the risk of disputes.
Premises Liability Risk Reduction: We advise on safety policies, documentation, and insurance strategy to protect your business from claims related to accidents and unsafe conditions.
Don’t wait for a regulatory inquiry, customer dispute, or employee claim to force you into crisis mode. Contact Crowley Law LLC today to protect your company’s assets and its future.