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Many legal mistakes made by new businesses are entirely avoidable. This article outlines the 10 most common pitfalls – from informal agreements and share issues to hiring errors and IP neglect – and explains how to avoid them. Getting these fundamentals right early on can prevent costly disputes and protect your business as it grows.

Protect your business early with expert guidance that helps you avoid any legal missteps.

<p>When starting a new business (or growing an existing business), legal mistakes can be costly. Poor decision-making and large errors can trigger serious disputes or regulatory penalties, and even small errors can build up over time and damage a business’s chance of success.</p>
<p>Below, we outline 10 of the most common legal pitfalls businesses fall into and how to avoid them.</p>
<h2>1. Not putting agreements in writing</h2>
<p>In our previous article on <a href="https://www.linnearlegal.co.uk/resources/written-vs-verbal-contracts-myth-busting-uk-contract-law/">myth-busting contract law</a> in the UK, we tackled misconceptions around verbal contracts. Put simply, a contract doesn’t have to be in writing to be legally binding – verbal agreements can be legally binding provided they contain all the necessary <a href="https://www.linnearlegal.co.uk/resources/six-key-elements-legally-enforceable-contract/">elements of a contract</a>. However, this doesn’t mean that a verbal contract is a good idea.</p>
<p>While they can be legally binding, verbal contracts can be notoriously difficult to enforce and leave your business exposed to significant risks. We always recommend drafting a written contract. Not only does this provide clarity – it also creates a paper trail that can protect your business in case of a dispute.</p>
<p>Whether dealing with suppliers, clients or collaborators, it’s always best practice to formalise the agreement in writing.</p>
<h2>2. Choosing the wrong business structure</h2>
<p>The structure you choose (e.g. sole trader, partnership, private limited company or LLP) when creating a business affects everything from tax and liability to funding and control. Many new business owners default to a structure without considering its long-term implications, and this can be damaging.</p>
<p>For example, operating as a sole trader exposes you to unlimited personal liability, which can cripple your personal liquidity and derail your business. By the same token, operating as a limited company involves administrative obligations, which may be unsuitable or burdensome for a business operated by one person.</p>
<h2>3. Bringing in business partners without considering ownership and control</h2>
<p>A particularly thorny problem for many businesses that can cause significant issues over time is bringing in individuals without setting out clear terms of ownership and control, or without fully considering what this might mean for the business and whether it is appropriate. This can be particularly problematic when involving friends or family, as lines can easily get blurred between professional and personal interests.</p>
<p>It’s important to consider not just who will make decisions and how those decisions will be made, but also who is entitled to what. If you bring in a business partner without formalising ownership percentages, voting rights or financial entitlements – such as profit shares, dividends or sale proceeds – you risk future disputes. These issues become particularly acute if one party wants to exit, disagrees with the direction of the business or claims a larger stake than you intended. Clear agreements at the outset, ideally in a shareholders’ agreement, can help define control, prevent deadlock and ensure everyone understands their financial rights and responsibilities. Without a shareholder or partnership agreement in place, these questions can quickly lead to conflict.</p>
<h2>4. Lack of understanding around shares and share dilution</h2>
<p>Issuing shares without understanding their implications can lead to significant issues down the line. Every time new shares are issued, existing shareholders will be diluted unless protections are in place, which can result in each shareholder owning a smaller percentage of their company than they did before. This can cause resentment, legal disputes or loss of control for founders. Company owners should also be aware of the different classes of shares and the rights attached to them.</p>
<h2>5. Transferring instead of issuing shares</h2>
<p>New shareholders should usually be brought in through the <strong>issuance</strong> of new shares, not by <strong>transferring</strong> existing ones. Issuing new shares raises capital and expands ownership in a way that reflects the company’s growth. Transferring shares, on the other hand, simply reallocates existing ownership and does not bring in new funds – the payment goes to the transferor (i.e. the selling shareholder), not the company. Confusing these processes can have unintended tax and legal consequences.</p>
<p>For more information about issuing shares, as well as how shares and share dilution works, see our article ‘<a href="https://www.linnearlegal.co.uk/resources/how-to-issue-shares-in-your-company/">How to issue shares in your company</a>’.</p>
<h2>6. Not protecting intellectual property</h2>
<p>Your business name, logo, branding, inventions, code or content are some of your most valuable assets – but only if they&#8217;re protected. Many businesses delay registering trademarks, copyrights or patents until it&#8217;s too late. Others fail to ensure that employees or contractors assign their IP to the business. You should audit your IP assets early and take steps to register and secure ownership.</p>
<h2>7. Hiring people incorrectly</h2>
<p>Bringing in staff or contractors without understanding employment law exposes your business to significant risk. Common mistakes include:</p>
<ul>
<li>Not checking the right to work in the UK</li>
<li>Misclassifying employees as self-employed</li>
<li>Failing to provide a written statement of employment</li>
<li>Ignoring requirements around National Insurance and employers’ liability insurance</li>
</ul>
<p>Employment law in the UK is heavily regulated, and non-compliance can result in fines, tribunal claims and reputational damage. For more information on employment requirements for businesses, see our <a href="https://www.linnearlegal.co.uk/news-insights/tag/employment/">series on employment law</a>.</p>
<h2>8. Overlooking ongoing legal obligations as a company owner</h2>
<p>Running a limited company involves meeting various ongoing requirements such as filing annual accounts with Companies House, submitting confirmation statements and maintaining statutory registers. Missing a filing deadline may seem trivial, but repeated failures will be recognised and can lead to penalties, strike-off action or personal liability for directors.</p>
<h2>9. Issuing unpaid shares</h2>
<p>In most instances it’s not a good idea to issue unpaid shares. In some cases, businesses might issue shares to founders or early investors without asking for payment or formalising the terms, but this can create serious tax issues and legal issues down the line.</p>
<p>A common misunderstanding is that unpaid shares are simply a paper exercise, but in law, they represent a debt to the company. If a company issues, for example, 1 million £1 unpaid shares, it is legally entitled to demand that the shareholder pay £1 million at any time. This liability can also become relevant during insolvency, where the unpaid amount may be called in to satisfy creditors. To avoid unexpected demands or disputes down the line, all share issuances should be properly documented, with clear terms on what – if anything – is being provided in return.</p>
<h2>10. Not keeping proper records</h2>
<p>Accurate, up-to-date records are essential – not only to meet legal requirements but also to support strategic decisions and attract investors. This includes financial records, employment contracts, shareholder registers and corporate filings.</p>
<h2>Don’t make the same mistakes</h2>
<p>Most legal mistakes are avoidable with the right advice and a little foresight. Early legal input can prevent expensive problems later on. Whether you&#8217;re starting up, taking on investment or growing your team, it&#8217;s worth speaking to a solicitor who understands your commercial goals.</p>
<p>For expert legal guidance tailored to your business, <a href="https://linnearcms.wpenginepowered.com/get-in-touch/">get in touch</a> with Linnear Legal today.</p>


New businesses often make avoidable legal missteps. Learn how to steer clear of common pitfalls and lay a stronger foundation for growth and protection.

The 10 most common legal mistakes new businesses make

Avoid costly legal mistakes when starting or growing your business. Learn how to get contracts, shares, IP and compliance right.

The 10 most common legal mistakes new businesses make | Linnear Legal

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The 10 most common legal mistakes new businesses make

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