Starting a new business is an exciting leap—but it’s 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’re 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’ve 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’s 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 and started cold-calling owners. But after three months of slow growth, she realized most gyms either already had agencies or handled marketing in-house.
One of the most common startup mistakes is assuming there’s enough market demand. Without validating your idea with potential customers, you risk building a product or service no one needs. Startups often underestimate the importance of early-stage market research.
A good attorney can help you structure customer surveys, prepare early-stage NDAs, and even draft early service agreements that don’t overcommit you before you’ve found product-market fit.
2. Not Forming a Legal Entity Early On
Sarah was invoicing clients as a sole proprietor. One day, a client accused her of breaching a contract and threatened legal action. Without an LLC or corporation, Sarah’s personal assets were on the line.
Forming a legal entity—such as an LLC or S-corp—is foundational for protecting your personal assets. It also helps with tax planning and business credibility. This is a startup mistake I see too often: founders assume they’ll incorporate “later.” But later often comes too late.
An experienced startup attorney can guide you through choosing the right structure, filing formation documents, and ensuring you comply with state-specific legal and regulatory requirements.
3. No Operating Agreement or Founders’ Agreement
Sarah brought in a partner—Jake—who helped with sales. They shook hands and agreed to split revenue. Six months later, they disagreed on hiring, and Jake walked away—taking a major client with him.
Without a written founders’ agreement or operating agreement, disputes can quickly turn ugly. Early-stage startups often skip this step, assuming trust is enough. But business is business. These documents clarify ownership, responsibilities, buy-out terms, and decision-making.
Even single-member LLCs should have an operating agreement. It strengthens your legal protections and helps with bank accounts and fundraising.
4. Poor Financial Plan and Cash Flow Management
Sarah underestimated startup costs—she didn’t budget for taxes, software subscriptions, or an accountant. Her cash flow dwindled, and she relied on personal credit cards to stay afloat.
Poor cash flow management is one of the most common reasons startups fail. A detailed financial plan helps you anticipate fixed and variable costs, forecast revenue, and identify when to pivot or prioritize.
Your business lawyer can collaborate with your CPA to ensure your legal structure supports your financial goals, helping you avoid costly tax or liability issues.
5. DIY Contracts That Don’t Protect You
Sarah found a template online for her client contract. It seemed solid—until a client stopped paying, and she realized there was no late fee clause, no dispute resolution section, and no scope of work protection.
Startups that rely on generic contracts often find themselves unprotected. Custom contracts are an investment, not a luxury. A strong agreement protects your business relationships, sets expectations, and reduces risk.
Whether you’re hiring contractors, onboarding clients, or bringing on investors, work with a business attorney to draft or review every key agreement.
6. Ignoring Employment and Contractor Rules
Sarah hired two freelancers as “contractors,” but treated them like employees—dictating hours and requiring weekly meetings. She didn’t realize she was violating employment laws.
Misclassifying workers is another startup mistake that can lead to audits, penalties, and lawsuits. Many startups aren’t aware of the legal distinction between W-2 employees and 1099 contractors.
A startup attorney can help you navigate labor laws, draft compliant agreements, and avoid legal pitfalls with your hiring process.
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 agency with a similar name that had trademarked it.
Intellectual property is often a startup’s most valuable asset. Failing to protect it early can mean losing your brand, your content, or even your business.
Register your trademark. Protect your content with copyright. Secure your software and branding. A startup lawyer can help you register your IP and avoid infringing on someone else’s.
8. Waiting Too Long to Hire Help
Sarah wore every hat—sales, design, billing—until she burned out. But when she tried to hire help, she hadn’t prepared any employee documents or onboarding plans.
Startups often wait too long to hire or hire too fast without clear job roles or legal agreements. Either approach can be costly.
Get help with the hiring process before you extend an offer: job descriptions, offer letters, non-disclosure agreements, and employee handbooks. Your attorney can help with all of it.
9. Overlooking Legal Compliance and Licenses
Sarah assumed she didn’t need any licenses because her work was all online. But her city required a business license, and her state required sales tax registration. She racked up fees and penalties.
Many startup mistakes involve simply not knowing what’s required. Business licenses, industry-specific regulations, sales tax, privacy policies—these vary by state and city. Failing to comply can cost you.
Working with a local attorney ensures your startup complies with legal and regulatory requirements from day one.
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 to sell. She missed out on opportunities because her business wasn’t structured to scale.
Startups that survive often fail to plan for what’s next. A business attorney can help you explore options for raising capital, bringing on partners, or planning for a sale or merger.
Thinking about the long-term path to success—whether that means scaling, selling, or stepping back—is essential for your startup’s future.
Key Takeaways: Legal Lessons from the Startup Trenches
Validate your idea with real market research.
Form a legal entity early and protect your personal assets.
Get key agreements in writing—especially with partners.
Plan your finances and track cash flow closely.
Invest in custom contracts that reflect your business.
Classify workers correctly and follow labor laws.
Protect your brand and intellectual property.
Prepare legally and strategically before you hire.
Don’t overlook licenses and compliance requirements.
Think beyond launch—plan your growth or exit.
Need help launching your startup in Utah, Arizona, or Texas? I offer flat-fee startup legal packages to help you get your business formed, protected, and ready to grow. Book a free consultation today to get started.
