Staying Compliant: Most Common Legal Issues Faced by Small Businesses

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There's a lot that goes into running a small business. From managing employees and keeping customers happy to handling the finances and day-to-day operations, it's a job that can keep anyone's hands full.

And on top of all that, all businesses are under the jurisdiction of their country's legal standards and regulations.

That said, legal issues are often one of the last things on a business owner's mind—until something goes wrong

If you're not careful, your business could face hefty fines, penalties, and even lawsuits that could force you to shut down your doors.

To help you avoid any legal trouble, we've compiled a list of the most common legal issues faced by small businesses:

1) Lack of labour law compliance

The employment process is full of potential legal pitfalls, from the hiring process to day-to-day management and firing.


As a business owner, it's critical to ensure that your hiring practices are fair and non-discriminatory, that you're paying employees correctly and providing the appropriate benefits, and that you're not violating any of their rights as workers.

In addition to this, many employers hire independent contractors without realizing that they may actually be classified as employees under the law.

For example, you could be asking your independent contractor to be on-call at all hours or do work that is closely supervised—both of which would likely lead to them being considered an employee.

By over-classifying independent contractors as employees, you could be subjecting your company to future penalties and fines

As such, make sure you understand the difference between employees and independent contractors before you bring anyone on board.

2) Failure to reinforce IP rights

Businesses tend to possess some form of intellectual property, whether it's a brand name, logo, website content, product, or even a unique process or method.

It's important to understand that this intellectual property is protected under law and that you could be sued if you inadvertently use it without permission. Feigning ignorance will not hold up in court.

To avoid any legal trouble, be sure to do your research and obtain the appropriate permissions as early as you can in your business lifecycle.

And just as importantly, make sure that you're own product and brand are protected. You have the right to stop others from using or profiting from your intellectual property, so don't be afraid to enforce your rights if necessary.

3) Choosing the wrong business structure

The business structure you choose for your company will have major implications on the amount of taxes you pay, the level of personal liability you face, and the amount of personal responsibility you have for the business.

Staying Compliant Most Common Legal Issues Faced by Small Businesses

As such, it's important to choose the right business structure for your company.

Small businesses in the UK are considered to be those that employ less than 50 people and have an annual turnover of less than £10 million. In most cases, a sole proprietor or partnership will suffice.

But in a few cases, you may want to consider setting up as a limited company. This is usually the best option if you plan on growing your business or if you want to limit your liability.

Lawyers with LegalVision or other legal firms can be an absolute blessing when deciding the right business structure for your company.

By getting legal advice from the outset, you can avoid any future problems, legal and otherwise, that could arise from choosing the wrong structure.

4) Wrong license selection

Licenses are requirements for businesses to operate legally. Depending on the type of business you have, you may need to obtain a license from the local authority to commence operations and trade.

For example, businesses that sell food or alcohol will need to have the appropriate licenses in place before they can start trading.

Failing to obtain the correct license for your business could lead to hefty fines and even forced closure. As such, it's important to make sure you're compliant with all licensing requirements before you even start selling. 

If you're unsure whether your business needs a license to operate, check a license finder on your local government's website.

5) Incorrect tax deduction claims

In the UK, companies are required to pay taxes on their profits. This is done through a corporation tax, which is levied at 20% for small businesses.

It's important to keep accurate records of your tax deductions, as over-claiming can lead to an audit from HMRC. This could result in large penalties, so it's always better to be safe than sorry.

When in doubt, speak to a tax accountant or lawyer who can help you navigate the complex world of taxes and ensure that you're compliant with all regulations.

6) Lack of a paper trail

Handshakes and verbal agreements are as good as nothing in the eyes of the law. If you want to be legally binding, you need to have a contract in place. This is especially important if you're working with suppliers, customers, or contractors.


Having a contract gives both parties a clear understanding of the terms of the agreement and protects each party's interests in case anything goes wrong

Without a contract, you'll have a significantly harder time enforcing your rights in court, even if you're totally in the right.

7) Mismanagement of customer data

Privacy laws are becoming increasingly strict, both in the UK and around the world.

If you collect, store, or use any personal data (including names, addresses, phone numbers, and email addresses), you need to be compliant with data protection laws.

This includes ensuring that you have a valid reason for collecting the data, getting explicit consent from the customer, and ensuring that the data is stored securely.

You can legally cover yourself by posting a "Privacy Policy" page on your website and making sure that customers are made aware of it.

This page, which the customer should agree with before proceeding with any business relationship, must detail how their data is used and the security protection you have in place.

Also, a "Limitation of Liability" clause can help protect your business in case of any privacy breaches.

This clause essentially states that the customer agrees not to hold you liable for any damages resulting from a data breach, so long as you've taken reasonable steps to prevent it.

8) False advertising

UK businesses need to ensure that they comply with the guidelines enforced by the Advertising Standards Authority (ASA)—otherwise known as the UK's independent regulator of advertising

Their job is to make sure that ads shown in the country are legal, decent, honest, and truthful.

While the majority of marketers don't rely on dubious tactics to market their brand, a handful of marketing material can be flagged for being offensive, harmful, or misleading.

If marketers don't comply with ASA, they will enforce sanctions by using SEO tactics in their favour and working with social media companies to warn consumers about your brand, effectively tarnishing your business's reputation.

Some examples of false advertising include making unsubstantiated claims, bait-and-switch tactics, and failing to disclose material information.

Email marketing has to also abide by these rules, so be sure to familiarize yourself with the guidelines before sending out your next campaign.

If you're found to be in breach of any of these standards, you could face some serious consequences. Reputation aside, false advertising is unethical and an unsustainable way to run a business.

9) Late payments

If you habitually pay your invoices late, the businesses you owe money to may take legal action against you in the form of a collection lawsuit.

This demand not only halts your operations, but it could also leave you with expensive legal fees on top of your outstanding payment.

The same goes for if you're expecting payments from customers and they're consistently late.

While it can be tempting to just let it slide, tardiness can quickly turn into a cash flow nightmare. The business scene is a cutthroat arena, and it's important to protect your interests by setting—and enforcing—strict payment terms.

It's easier said than done, but having proactive strategies in place regarding payments and collections can save you a lot of headaches down the road

Clearly state your payment terms upfront, and follow up promptly if payments are late. You can also consider using a collections agency to help you recoup any unpaid debts.

10) Class-action lawsuits

Class-action lawsuits are civil cases where a group of people collectively sue a defendant for damages they've suffered.


While larger corporations see class-action lawsuits more, small businesses may also be at risk if they have caused great harm to a community or the environment.

Technology and biotech fields are the most likely to be targeted in a class-action lawsuit, but any business can be at risk if they've been careless or reckless in their actions.

Product liability is also a common reason for these lawsuits, so it's important to double-check that your products are safe and fit for consumption before putting them up for sale.

About the author 

Peter Keszegh

Most people write this part in the third person but I won't. You're at the right place if you want to start or grow your online business. When I'm not busy scaling up my own or other people' businesses, you'll find me trying out new things and discovering new places. Connect with me on Facebook, just let me know how I can help.

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