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Common Mistakes Companies Make That Lead To Legal Trouble

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Every business wants to avoid finding itself inundated with lawsuits due to a preventable failure of compliance. Unfortunately, ignorance is not a defense that will hold up in court. Whether a business breaks compliance with a law intentionally or accidentally, they will still be held accountable for their actions. The best way to avoid ending up on the wrong side of a subpoena is education, and following proper procedures for example workers compensation laws. So, here are a few of the common mistakes companies make.

Personal Checking Account

If a business owner is struggling to cover their personal debt, they can never reach into the company funds to cover their costs. While that may be obvious, it is the less obvious write-offs that lead to trouble. Writing personal expenses as business expenses is a surefire way to end up in the sights of the IRS. They do not take kindly to this practice and will issue strict penalties to employers who cannot properly document their business expenses with reasonable arguments.

Workers Compensation

Cutting corners to lower expenses is a common technique for businesses. However, there legal ways to do this and illegal ways. Too frequently, employers ignore state statutes and attempt to avoid their workers compensation obligations. The Department of Labor (DOL) will issue audit penalties to companies that attempt to skirt their workers compensation responsibilities. Beyond the consequences set forth by the DOL, problems will arise in other facets of the business, such as employee morale. It is well known that the happiness of employees is a significant contributor to your company culture and productivity, so shorting your employees on worker’s compensation will lead to an erosion of morale. Cutting corners may seem convenient at the time, but it will come back to manifest itself in much more severe penalties.

Employee Classification

The line between employee and independent contractor can be blurry at times, but making sure you accurately classify your workers is important. Improperly documenting employees as independent contractors can be costly, whether the violation is intentional or accidental. The Department of Labor requires that employers who have assent, benefit and control over their workers be W-2 employees. Some businesses attempt to avoid this obligation and cut costs by hiring a staff of independent contractors. Businesses guilty of misclassified workers leave themselves vulnerable to large penalties for unpaid wages and taxes on top of potential lawsuits.

Corporate Investments

Purchasing a company or stock options without properly registering capital gains taxes can quickly lead to trouble with the IRS. Investors occasionally write-off corporate investments, such as a $200,000 stock purchase, as a business expense even though it is an asset purchase. Improper registration of the capital gain and subsequently not paying taxes on it will cause the IRS to pursue stiff penalties when it inevitably comes to their attention.

Intellectual Property

An unfortunately common mistake companies make is using intellectual property that is registered under someone else. Avoiding the small fee to legally own the rights to a photo is a much friendlier alternative to the legal consequences that can arise from using intellectual property without owning the rights. Even companies who have been in business for years can be inundated with lawsuits from competitors for brands or domains that are too similar. Intellectual property is a slippery slope, and infringing on the copyright of another entity can easily happen by accident.

Expensive lawsuits can lead to irreparable damage to a business. The best way to prevent that is to understand and maintain compliance with the laws pertaining to your business. If your company is not large enough to staff a human resources department to follow compliance, then hiring an attorney can be a great asset to the health of your business. Putting forth effort and resources now can prevent significant losses in the future.


Mason Cole, co-founder of Cole Sadkin LLC.

Website: www.colesadkin.com

Mason Cole, the firm’s founding partner, focuses his practice on intellectual property. Whether you are looking to start a small entrepreneurial business or wanting to protect the next million-dollar idea, Mr. Cole specializes in guiding you from the initial incorporation or trademark to your exit strategy and every stage in between. Mr. Cole brings a certain sense of compassion and ingenuity to every situation and case. He builds a strong interest in helping you with your individual and business needs, and invests time in working together to reach a shared vision.

Mr. Cole has spoken at several events, such as the Central Lakeview Merchants Association on landlord-tenant issues, Loyola University on intellectual property and at DePaul University MBA on corporate formation. Furthermore, he remains actively involved in the Chicagoland community today through extensive networking, and is President of YPB within the Small Business Advocacy Council. Our firm is also on the board of the Small Business Advocacy Council.

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