Starting a new business is an exciting leap—but it is not without risk. Every startup begins with passion, vision, and energy, but many fizzle out because of preventable legal, financial, and operational missteps. If you are starting a business in Utah, Arizona, or Texas, this guide is for you.
As a business attorney who has helped dozens of startups navigate formation, compliance, contracts, and growth, I have seen the same mistakes pop up time and again. And while no startup is immune to challenges, knowing what to avoid—and having the right legal and strategic support—can dramatically increase your chance of success.
Let us walk through the top 10 common startup mistakes, framed through the story of a fictional entrepreneur named Sarah, who launched a promising digital marketing agency… without quite having her legal ducks in a row.
1. Skipping Market Research: Are You Solving a Real Problem?
Sarah had a great idea: a marketing agency tailored for local gyms. She built a website, printed business cards, and launched—only to discover the gym market was already saturated with low-cost competitors. Within six months, she pivoted twice and burned through her initial capital.
One of the most common startup mistakes is assuming there is enough market demand for your product or service. Before investing time and money, validate your idea. Conduct competitive analysis, talk to potential customers, and study market trends.
A good attorney can help you structure customer surveys, prepare early-stage NDAs for market discussions, and ensure your business plan reflects realistic demand. These foundational steps may seem small, but they prevent bigger problems later.
2. Not Forming a Legal Entity Early On
Sarah was invoicing clients as a sole proprietor. One day, a client accused her of breach of contract and threatened to sue. Because she had no legal entity, her personal bank accounts, car, and home were at risk.
Forming a legal entity—such as an LLC or S-corp—is foundational for protecting your personal assets. It also adds credibility, simplifies tax planning, and positions your startup for future growth or investment.
An experienced startup attorney can guide you through choosing the right structure for your goals, whether that is an LLC, S-corp, C-corp, or partnership—and can help you register your entity in your home state or strategically in another.
3. No Operating Agreement or Founders Agreement
Sarah brought in a partner—Jake—who helped with sales. They shook hands and agreed to split profits 50/50. But when Jake stopped showing up, Sarah had no legal recourse. There was nothing in writing.
Without a written founders agreement or operating agreement, disputes can quickly derail your business. These documents should outline ownership stakes, decision-making authority, profit sharing, what happens if someone leaves, and more.
Even single-member LLCs should have an operating agreement. It strengthens your liability protection and clarifies your intent in the eyes of courts, banks, and future investors.
Poor cash flow management is one of the most common reasons startups fail. A detailed financial plan helps you forecast expenses, manage runway, and identify when you need additional capital.
4. Poor Financial Plan and Cash Flow Management
Sarah underestimated startup costs—she did not budget for taxes, software subscriptions, or a slow first quarter. Within months, she was dipping into personal savings.
Poor cash flow management is one of the most common reasons startups fail. A detailed financial plan helps you forecast expenses, manage runway, and identify when you need additional capital—whether from loans, investors, or personal funds.
Your business lawyer can collaborate with your CPA to ensure your legal structure aligns with tax planning goals and help you prepare for investor conversations down the road.
5. DIY Contracts That Do Not Protect You
Sarah found a template online for her client contract. It seemed solid—until a client refused to pay, and she realized the agreement had no teeth. No late fee clause, no jurisdiction clause, and no clear deliverables.
Startups that rely on generic contracts often find themselves unprotected. Custom-drafted agreements—tailored to your services, industry, and risk profile—can save you thousands in disputes.
Whether you are hiring contractors, onboarding clients, or bringing on investors, get professional help with contracts early. The cost of drafting is almost always less than the cost of a legal fight.
6. Ignoring Employment and Contractor Rules
Sarah hired two freelancers as “contractors,” but treated them like employees—dictating hours, providing equipment, and integrating them into her daily workflow. She later faced an IRS audit.
Misclassifying workers is another startup mistake that can lead to audits, penalties, and back taxes. The distinction between employees and independent contractors is not just about what you call someone—it is about control, tools, and the nature of the relationship.
A startup attorney can help you navigate labor laws, draft compliant agreements, and set up proper hiring processes from day one.
7. Failing to Protect Intellectual Property (IP)
Sarah came up with a catchy brand name and designed a logo. A year later, she got a cease-and-desist letter from another company claiming trademark rights. She had never searched for existing trademarks—or registered her own.
Intellectual property is often a startup’s most valuable asset. Failing to protect your brand, content, inventions, or processes early can expose you to infringement risks—or cost you the ability to grow.
Register your trademark. Protect your content with copyright. Secure your software or inventions with patents if applicable. And always conduct a trademark search before committing to a brand name.
Startups that survive often fail to plan for what is next. Thinking about the long-term path to success—whether that means scaling, selling, or stepping back—is essential to building lasting value.
8. Waiting Too Long to Hire Help
Sarah wore every hat—sales, design, billing—until she burned out. But when she tried to hire, she did not have contracts, onboarding procedures, or even a clear job description.
Startups often wait too long to hire or hire too fast without clear job roles or legal protections. Before bringing someone on—whether as an employee or contractor—you need a written agreement, an onboarding plan, and a clear understanding of the relationship.
Get help with the hiring process before you extend an offer: job descriptions, offer letters, confidentiality agreements, and more. This prevents disputes and misunderstandings later.
9. Overlooking Legal Compliance and Licenses
Sarah assumed she did not need any licenses because her work was all online. But when she expanded into a new state, she learned her business required registration—and she owed back fees.
Many startup mistakes involve simply not knowing what is required. Business licenses, industry-specific permits, sales tax registration, and state filings are often overlooked by new entrepreneurs eager to launch quickly.
Working with a local attorney ensures your startup complies with legal and regulatory requirements from the beginning—so you avoid fines and enforcement actions down the road.
10. Not Having a Plan to Scale or Exit
Sarah built a sustainable business but had no plan for growth—or what to do if she wanted out. When a competitor offered to buy her, she had no idea how to value her business or structure a deal.
Startups that survive often fail to plan for what is next. A business attorney can help you think through succession planning, investment readiness, and exit strategies—whether that means selling, merging, or passing the business on.
Thinking about the long-term path to success—whether that means scaling, selling, or stepping back—is essential to building lasting value.
Key Takeaways: Legal Lessons from the Startup Trenches
- Validate your idea with real market research before investing significant resources.
- Form a legal entity early and protect your personal assets from business liability.
- Get key agreements in writing—especially with partners and co-founders.
- Plan your finances and track cash flow closely to avoid running out of runway.
- Invest in custom contracts that reflect your business and protect your interests.
- Classify workers correctly and follow employment and labor laws.
- Protect your brand and intellectual property before someone else claims it.
- Prepare legally and strategically before you hire your first team member.
- Do not overlook licenses, permits, and compliance requirements in your state.
- Think beyond launch—plan your growth, investment, or exit strategy early.
Need help launching your startup in Utah, Arizona, or Texas? I offer flat-fee startup packages that cover formation, operating agreements, and essential contracts. Contact me today to schedule a consultation and start your business on the right legal footing.
