Starting a business is exciting. Whether you are launching a technology startup, opening a retail location, or turning a side hustle into a full-time venture, there is no shortage of decisions competing for your attention.
As both a business attorney and a small business owner, I understand the pressure to move quickly. Many entrepreneurs focus on customers, revenue, and growth while putting legal issues on the back burner. Unfortunately, some of the most expensive business problems I see could have been prevented with a little planning at the beginning.
Here are five of the most common legal mistakes new Denver business owners make and how to avoid them.
1. Choosing the Wrong Business Structure
Many business owners form an LLC because it is simple and relatively inexpensive. Others start operating without forming any entity at all.
While an LLC is often a good choice, it is not always the best option. The right structure depends on factors such as liability concerns, tax considerations, ownership plans, investor expectations, and long-term growth goals, including what your exit strategy is.
Why It Matters
Your business structure affects:
- Personal liability protection
- Tax treatment
- Ownership rights
- Management authority
- Future fundraising opportunities
- Business succession planning ((AKA exit planning)
Changing structures later can be more complicated and expensive than making the right decision from the start.
Practical Guidance
Before filing paperwork, consider where you want the business to be in three to five years. The structure that works today should also support your future plans.
2. Operating Without Clear Written Agreements
Many entrepreneurs rely on verbal understandings when working with partners, vendors, contractors, or customers. This often works well until expectations change or a disagreement arises.
A handshake agreement may feel sufficient when everyone is excited about a new opportunity, but memories fade and circumstances change.
Why It Matters
Without clear written agreements, disputes often arise over:
- Payment terms
- Ownership interests
- Responsibilities
- Intellectual property rights
- Project deadlines
- Exit rights
The cost of resolving these disputes typically exceeds the cost of creating a proper agreement in the first place.
Practical Guidance
At a minimum, important business relationships should be documented in writing. A well-drafted agreement helps everyone understand expectations and provides a roadmap if problems occur.
3. Bringing on Business Partners Without Discussing Difficult Issues
Many partnerships begin with enthusiasm and shared goals. Few begin with conversations about what happens if someone wants to leave, stops contributing, or becomes disabled, or if there is disagreement between the owners about the future of the company.
Unfortunately, these situations occur more often than most founders expect.
Why It Matters
Partnership disputes can disrupt operations, damage customer relationships, and threaten the future of the business.
The most successful partnerships address difficult questions before they become actual problems.
Practical Guidance
If you have business partners, create a comprehensive operating agreement or shareholder agreement that addresses:
- Ownership percentages
- Decision-making authority
- Profit distributions
- Buyout rights
- Dispute resolution procedures
- Exit strategies
Having these discussions early is much easier than having them during a conflict.
4. Misclassifying Workers
Many growing businesses rely on independent contractors because it offers flexibility, lower administrative costs and you don’t have to do payroll. However, simply calling someone a contractor does not make them one under the law.
Worker classification is an area where many businesses unintentionally create significant risk.
Why It Matters
Improper classification can lead to:
- Back taxes
- Penalties
- Wage claims
- Employment law violations
- Government audits
Colorado employers face increasingly complex employment compliance requirements, making proper classification more important than ever.
Practical Guidance
Before hiring workers, evaluate whether the relationship meets the legal requirements for independent contractor status. When in doubt, seek guidance before making the classification decision.
5. Signing Contracts and Leases Without Understanding the Risks
Many new business owners are so focused on getting started that they sign contracts without fully reviewing them.
I frequently see business owners sign commercial leases, vendor agreements, software contracts, and service agreements without understanding the long-term obligations they are accepting.
Why It Matters
A contract can create obligations that last for years. A commercial lease, for example, may become one of the largest financial commitments your business ever makes.
Seemingly minor provisions can have significant consequences related to:
- Personal guarantees
- Automatic renewals
- Termination rights
- Indemnification obligations
- Rent increases
- Dispute resolution requirements
Practical Guidance
Before signing any significant agreement, take the time to understand the business and legal implications. Questions asked before signing are typically much less expensive than disputes after signing.
The Value of Preventive Legal Planning
One of the biggest misconceptions about attorneys is that we are only needed when something goes wrong.
In reality, legal guidance is often most valuable before major decisions are made. Business formation, contracts, hiring decisions, leases, and ownership arrangements are much easier to address proactively than to fix later.
Most successful businesses do not avoid problems because they are lucky. They avoid many problems because they build systems, agreements, and processes that reduce risk from the beginning.
Investing in legal planning early can help protect your business, support growth, and provide confidence as you move forward.
Frequently Asked Questions
When should I hire a business lawyer for my new business?
Many business owners assume they only need a lawyer when a problem arises, but legal guidance is often most valuable before important decisions are made. A business attorney can help you choose the appropriate business structure, review contracts, address employment issues, and identify potential risks before they become costly problems. Early planning is generally less expensive and less disruptive than correcting mistakes after your business is already operating.
Do I really need an LLC for my small business?
Not every business requires an LLC, but many entrepreneurs choose one because it can provide liability protection and operational flexibility. The right structure depends on your industry, growth plans, ownership arrangements, tax considerations, and risk exposure. Before forming a business entity, it is helpful to evaluate both your current needs and your long-term business goals.
What happens if I operate my business without written contracts?
Operating without written agreements can create misunderstandings about responsibilities, payment terms, ownership rights, and expectations. While verbal agreements may be legally enforceable in some situations, they are often more difficult to prove and enforce. Clear written contracts can reduce disputes and provide a framework for resolving issues when they arise.
What is the difference between an employee and an independent contractor?
The distinction depends on several legal factors, including the level of control the business exercises over the worker and the nature of the working relationship. Simply calling someone an independent contractor does not automatically make the classification correct. Misclassification can lead to tax issues, wage claims, penalties, and other compliance concerns.
Why should business partners have a written agreement?
Business partners often start with shared goals and strong working relationships, but circumstances can change over time. A written agreement can address ownership percentages, management responsibilities, profit distributions, dispute resolution procedures, and exit strategies. Having these conversations early can help prevent misunderstandings and protect the business if challenges arise.
Final Thoughts
Every new business faces challenges. The goal is not to eliminate risk entirely but to identify and manage risks before they become costly distractions.
If you are starting or growing a business in Denver, taking time to address these foundational legal issues can help create a stronger platform for long-term success.
About the Author
I am Elizabeth Lewis, a Denver business attorney and owner of the Law Office of E.C. Lewis, P.C. Since 2010, I have helped entrepreneurs and small business owners address legal issues involving business formation, contracts, employment matters, commercial leases, compliance, growth, and exit planning. As a fifth-generation business owner, I understand the practical challenges that come with building and operating a successful business.
Need Help With Your Business?
If you have questions about starting, growing, or protecting your business, contact the Law Office of E.C. Lewis, P.C. to discuss your situation and explore your options.
Disclaimer: This article is provided for informational and educational purposes only. It does not constitute legal advice, does not create an attorney-client relationship, and should not be relied upon as legal advice for any specific situation. Readers should consult an attorney regarding their particular circumstances.