Common Legal Mistakes Small Businesses Make (and How to Avoid Them)

Running a small business in Massachusetts is rewarding, but legal missteps can be costly. At Bombard Law, we routinely help business owners navigate these challenges before they escalate. Here are seven common mistakes we see, and how to avoid them:

1. Skipping the Operating Agreement or Bylaws Even single-member LLCs and closely held corporations need formal governance documents.

• Courts enforce written agreements, even those that are boilerplate. See Butts v. Freeman, 96 Mass. App. Ct. 827 (2020).

• Without clear terms, disputes over ownership, voting rights, or profit distribution can spiral.

Solution: Draft operating agreements or bylaws tailored to your business structure.

2. Misclassifying Workers The line between employee and independent contractor isn’t always clear, and misclassification can trigger audits.

• Massachusetts applies a strict three-prong test under G.L. c. 149, § 148B.

• Missteps may result in wage claims, tax penalties, and liability under federal law.

Solution: Review roles carefully before hiring. When in doubt, seek legal guidance.

3. Ignoring Beneficial Ownership Reporting The Corporate Transparency Act (CTA) requires most small entities to report ownership to FinCEN.

• Noncompliance can result in $500/day penalties and potential criminal charges.

• Many businesses are unaware of this new federal requirement.

Solution: File your BOI report promptly and update it within 30 days of any change in ownership.

4. Failing to Document Agreements Handshake deals and email threads are not admissible in court.

• Courts favor integrated written contracts, especially under the Statute of Frauds.

• Informal arrangements often lead to disputes over scope, payment, or termination.

Solution: Formalize key relationships—such as leases, vendor agreements, and employment terms—with signed contracts.

5. Overlooking Successor Liability in Asset Sales Buying or selling a business? You may inherit liabilities if the transaction isn’t structured correctly.

• Massachusetts courts have pierced asset-only deals where continuity exists. See Prism Group Inc. v. Slingshot Technologies.

• Liability can include unpaid taxes, employment claims, or breaches of contract.

Solution: Use indemnification clauses, escrow arrangements, and due diligence to mitigate exposure.

6. Neglecting Annual Filings and Corporate Formalities Failure to file annual reports or maintain accurate records can result in administrative dissolution.

• Loss of good standing affects contracts, financing, and litigation rights.

• Many businesses miss deadlines or fail to update their registered agent information.

Solution: Calendar filings with the Secretary of the Commonwealth and maintain meeting minutes.

7. Not Consulting Counsel Early Enough Owners often seek legal advice reactively—after a dispute or regulatory issue arises.

• Preventive counsel is more cost-effective than litigation.

• Early guidance helps avoid costly mistakes and strengthens your position.

Solution: Consider fractional general counsel services to stay ahead of the curve in managing risk.