Top 5 Legal Mistakes Small Businesses Make and How to Avoid Them 

Starting and running a small business can be incredibly rewarding, but it also involves numerous responsibilities that go beyond just operations and marketing. One aspect frequently neglected by business owners is the legal groundwork of their company. Legal errors can drain a business of thousands of dollars, harm its reputation and even result in its shutdown. Fortunately, most of these issues can be avoided with a little foresight and the right legal advice. 

We will explore the top five legal mistakes small businesses make and offer practical solutions to help you protect your business from the outset. 

1. Not Having a Written Business Agreement 

One of the most common mistakes made by new business owners is operating without a written agreement between business partners. Whether you're starting a business with a close friend, spouse, or professional acquaintance, having a clear agreement in place is critical. 

In the early stages of a business, everyone tends to be on the same page. However, as the business grows, conflicts may emerge. Matters such as profit distribution, who has decision-making power, individual contributions and how to handle exit strategies can become sources of tension if not discussed early on. 

Without a written agreement such as a partnership agreement, shareholder agreement, or joint venture agreement, there's no clear process for resolving disputes or understanding individual responsibilities. This ambiguity can result in expensive legal battles or potentially the breakup of the business. 

How to Avoid It 

• Engage a commercial lawyer to draft or review a partnership or shareholder agreement tailored to your business. 

• Ensure it outlines roles and responsibilities, contributions, profit-sharing arrangements, and an exit plan. 

• Revisit and update the agreement as the business grows or circumstances change. 

Having a solid legal agreement isn't about anticipating the worst, it's about preparing for the unexpected. 

2. Using Poorly Drafted or No Contracts at All 

Another significant danger is relying on verbal agreements or generic online templates when forming contracts with clients, suppliers, or employees. 

Contracts serve as the foundation of any business relationship. Without clear terms in writing, it's difficult to enforce agreements or protect your rights in the event of a dispute becoming challenging. 

Many small business owners make the mistake of copying and pasting contracts from the internet, unaware that these documents may not align with local regulations or accurately reflect the nature of their business. Worse still, some don’t use contracts at all, relying instead on good faith. 

How to Avoid It 

• Invest in professionally drafted contracts tailored to your business and industry. 

• Use contracts for all client engagements, supplier relationships and employment arrangements. 

• Clearly outline payment terms, deliverables, dispute resolution procedures and termination clauses. 

• Ensure contracts comply with relevant Australian Consumer Law and industry-specific regulations. 

Establishing a proper contract can prevent misunderstandings, safeguard your income, and establish clear expectations. 

3. Failing to Protect Intellectual Property (IP) 

Your brand, logo, products, website material, and even your business name represent important forms of intellectual property. Numerous businesses overlook the need to safeguard these assets, believing they are automatically protected or that no one would attempt to use them. 

Failing to register your intellectual property means that another party could replicate or even register your brand before you have the chance to do so. Moreover, if you utilise a logo or tagline developed by a freelancer without legally establishing ownership, you might not have the rights to use it. 

How to Avoid It 

• Register your trademarks (business name, logo, slogan) with IP Australia. 

• If you hire contractors or freelancers, ensure your contracts contain a clause assigning intellectual property rights to your business. 

• Conduct an IP audit to identify what should be protected. 

• Consider registering domain names and social media handles associated with your brand. 

Safeguarding your intellectual property ensures your business remains unique and gives you legal recourse if someone tries to imitate or exploit your brand. 

4. Misclassifying Workers as Contractors Instead of Employees 

The emergence of the gig economy and flexible work setups has created ambiguity in how workers are classified. Although employing an individual as an independent contractor might appear easier or less expensive, it can backfire if the classification is incorrect. 

Incorrectly classifying an employee as a contractor can lead to significant penalties from the Australian Taxation Office (ATO) or the Fair Work Ombudsman. You may be required to back-pay superannuation, leave entitlements and even face fines. 

The main difference lies in the degree of control, independence, and involvement in the business. Contractors typically operate their own businesses and work according to their own preferences, while employees are directed by you and usually adhere to consistent working hours. 

How to Avoid It 

• Understand the legal criteria for determining whether someone is an employee or contractor. 

• Use proper employment contracts and avoid relying on handshake deals. 

• If unsure, seek legal advice before engaging new workers. 

• Regularly review your workforce arrangements, especially if the nature of work changes. 

Correct classification protects your business from liability and ensures workers are treated fairly. 

AMT Lawyers and Associates is a leading law firm in Melbourne, helping small businesses navigate legal challenges and build a strong foundation for sustainable growth.

5. Neglecting Ongoing Compliance Obligations 

A lot of business owners believe that registering their company means they’ve fulfilled all legal requirements. However, maintaining compliance is a continuous responsibility. 

Failing to meet statutory obligations such as lodging annual returns, updating ASIC with director changes, or keeping accurate financial records can result in penalties, deregistration, or loss of liability protection. 

Other compliance areas include: 

• Privacy laws (if you collect customer data) 

• Work health and safety obligations 

• Consumer law compliance 

• Industry-specific licensing 

How to Avoid It 

• Set up a compliance calendar with key dates for ASIC, ATO and other regulators. 

• Work with a commercial lawyer and accountant to stay on top of changing obligations. 

• Regularly review your internal policies and procedures. 

• Train staff on relevant laws and policies. 

Good compliance isn’t just about avoiding penalties—it builds trust with customers, investors, and partners. 

Legal errors frequently occur not due to negligence on the part of business owners, but rather because they are stressed, lack information, or are attempting to reduce expenses in the short term. However, the truth is that seeking proper legal counsel from the outset can prevent far more costly issues down the line. 

By taking steps to document agreements, use proper contracts, protect your IP, classify workers correctly and stay compliant, you set your business up for long-term success. 

At AMT Lawyers and Associates we help small businesses build strong legal foundations so they can grow with confidence. If you’re unsure about any of the issues mentioned above, get in touch with our commercial law team for a consultation. 

Need help protecting your business? Contact AMT Lawyers and Associates for practical legal advice tailored to your business goals.