10 Common Legal Mistakes Small Businesses Should Avoid in New Jersey and New York

Running a successful business requires more than delivering a quality product or service. Many small businesses unintentionally create legal and financial exposure through avoidable mistakes involving business structure, contracts, employment practices, and day-to-day operations. These issues often remain hidden until a dispute, lawsuit, tax issue, or economic downturn exposes them.

Whether you operate in New Jersey or New York, understanding these common legal pitfalls can help protect your business, your assets, and your long-term success.

1. Operating as a Sole Proprietor Without Liability Protection

One of the most common mistakes small business owners make is operating without forming a legal entity such as a limited liability company (LLC) or corporation.

A sole proprietorship may seem simple and inexpensive, but it offers no separation between the business and the owner. If the business is sued, defaults on obligations, or incurs significant debt, the owner’s personal assets — including bank accounts, vehicles, investments, and even real estate — may be exposed.

Forming an LLC or corporation can provide the protection of the “corporate veil,” which generally limits liability to the assets owned by the business itself. While no entity structure is completely bulletproof, properly formed and maintained entities provide critical protection for business owners.

2. Undermining the Corporate Veil Through Sloppy Business Practices

Forming an LLC or corporation is only the first step. Courts can disregard the corporate entity and hold owners personally liable if the business is treated as the owner’s “alter ego.”

This is commonly referred to as “piercing the corporate veil.”

Courts typically look for patterns of abuse, poor recordkeeping, or misuse of the business entity. Common mistakes include:

• Failing to maintain an LLC operating agreement or shareholder agreement

• Not holding meetings or maintaining corporate records and minutes

• Failing to maintain ownership records

• Missing required annual or biennial state filings

• Mixing personal and business finances

• Paying personal expenses from company accounts

• Failing to document loans, capital contributions, or owner distributions

• Moving money freely between commonly owned companies

• Sharing employees, office space, equipment, or inventory between related businesses without documentation

No single mistake usually results in veil piercing. However, when multiple factors are present, courts may conclude that the business entity was used to commit a wrong or fraud.

3. Failing to Properly Document Business Ownership and Operations

Businesses with multiple owners should never rely on verbal understandings or assumptions.

An LLC operating agreement or shareholder agreement acts as the roadmap for how the business will operate and how disputes will be resolved. Without one, disagreements between owners can quickly become expensive and disruptive.

Well-drafted agreements should address:

• Ownership percentages

• Voting rights

• Roles and responsibilities

• Capital contribution obligations

• Profit distributions

• Buyout rights

• Retirement, disability, death, or exit of an owner

• Restrictions on transferring ownership interests

• Business valuation procedures

Many business disputes could be avoided entirely if the owners had addressed these issues in writing before problems arose.

4. Using Weak Contracts — or Ignoring the Contracts You Have

Small businesses frequently rely on handshake deals, generic online templates, or poorly drafted contracts that fail to protect the company when disputes arise.

A strong business contract should clearly define:

• The parties involved

• Scope of work

• Pricing and payment terms

• Deadlines and deliverables

• Default remedies

• Interest on unpaid balances

• Attorneys’ fees

• Indemnification obligations

• Venue and jurisdiction

• Warranty limitations or disclaimers

Generic “boilerplate” agreements often fail to address the realities of a specific business or industry. Worse, many businesses sign contracts without fully reviewing or understanding them.

Even a well-drafted contract loses value if the parties do not follow it. Failing to comply with notice provisions, payment procedures, deadlines, or documentation requirements can result in waived rights, breach claims, or loss of leverage in a dispute.

5. Signing Commercial Leases Without Understanding the Risks

A commercial lease is often one of the largest financial obligations a business undertakes, yet many business owners sign leases without fully understanding the terms.

Important lease provisions include:

• Rent and additional charges, including common area maintenance (CAM)

• Responsibility for repairs and maintenance

• Lease term and renewal rights

• Casualty and fire damage provisions

• Rights to make improvements

• Ownership of tenant improvements at lease termination

• Assignment and subletting rights

• Personal guaranties

• Default provisions and remedies

Many commercial lease disputes arise because business owners focus primarily on base rent while overlooking provisions that can significantly increase long-term costs or limit operational flexibility.

Before signing a commercial lease, businesses should fully understand both their financial obligations and their rights under the agreement.

6. Misclassifying Employees and Independent Contractors

Employment law mistakes can expose businesses to claims for unpaid wages, overtime, taxes, penalties, and attorneys’ fees.

Employee Overtime Misclassification

Many employers incorrectly assume that paying an employee a salary automatically makes the employee exempt from overtime requirements. That is not true.

To qualify as exempt from overtime laws, employees generally must satisfy both:

• A salary threshold requirement; and

• A duties test based on the nature of their job responsibilities.

Common exemption categories include executive, administrative, professional, and outside sales employees. Each category has specific legal requirements.

Misclassification claims are increasingly common and can become extremely expensive, especially if they involve multiple employees or long time periods.

Independent Contractor Misclassification

Businesses also frequently misclassify workers as independent contractors when the law considers them employees.

Courts and government agencies often evaluate factors such as:

• The level of control exercised by the company

• Whether the worker operates an independent business

• Who provides tools and equipment

• Whether the worker sets their own schedule

• How payment is structured

• Whether the services are integral to the business

  
  

The more control a company exercises over how work is performed, the more likely the worker will be classified as an employee rather than an independent contractor.

Businesses should also be aware that some states now require written agreements for certain freelance or independent contractor relationships and impose significant penalties for noncompliance.

7. Hiring Remote Employees in Other States Without Understanding the Consequences

Remote work has created new opportunities — and new compliance risks.

Hiring an employee who works remotely in another state may trigger obligations such as:

• Registering the business in that state

• Payroll tax registration

• Unemployment insurance obligations

• Compliance with another state’s employment laws

• Potential business tax filing obligations

Businesses should evaluate these issues before hiring out-of-state remote workers rather than after a problem arises.

8. Failing to Maintain and Follow an Employee Handbook

Employee handbooks are an important risk-management tool for businesses of all sizes.

A properly drafted handbook can help establish policies relating to:

• Anti-discrimination and harassment

• Attendance and leave

• Wage and hour practices

• Workplace conduct

• Technology and confidentiality

• Complaint procedures

• Remote work expectations

  
  

However, simply having a handbook is not enough. Businesses must also consistently follow their policies and regularly update the handbook to reflect changes in the law and workplace practices.

Inconsistent enforcement of workplace policies can create significant legal exposure.

9. Failing to Train Management

Many employment claims arise not because the company intended to violate the law, but because managers were never properly trained.

Business owners and supervisors should understand:

• Anti-harassment and anti-discrimination obligations

• Proper documentation practices

• How to respond to employee complaints

• Wage and hour compliance

• Leave and accommodation obligations

• Appropriate hiring and termination procedures

Training helps managers identify problems early and reduce the likelihood of disputes escalating into litigation.

10. Failing to Protect the Business with Restrictive Covenants

Businesses often invest substantial time and money developing customer relationships, confidential information, pricing structures, marketing strategies, and employee training.

Without properly drafted restrictive covenant agreements, those assets may walk out the door when employees leave.

Depending on the business and applicable law, enforceable agreements may include:

• Confidentiality agreements

• Non-solicitation agreements

• Non-compete agreements

• Non-disclosure agreements

However, restrictive covenants must be carefully drafted to maximize enforceability. Overly broad or generic agreements are often difficult to enforce and may provide little practical protection.

Protecting Your Business Before Problems Arise

Many of the most expensive business disputes are preventable. Taking proactive steps now — including forming the proper entity, maintaining corporate formalities, using strong contracts, understanding employment laws, and implementing sound policies — can significantly reduce legal risk and position your business for long-term success.

Businesses should periodically review their corporate structure, contracts, employment practices, and operational procedures to identify issues before they become costly problems.

At Fellig Schwartz LLC, we counsel businesses throughout New Jersey and New York on business formation, contracts, employment matters, commercial leases, dispute prevention, and litigation strategy. Proactive legal guidance can help businesses minimize risk, avoid disputes, and protect what they have built.

If your business needs guidance regarding contracts, employment practices, commercial leases, or dispute prevention strategies, contact Fellig Schwartz LLC to schedule a consultation.

About the Author

Audra Schwartz is a partner at Fellig Schwartz LLC, where she advises businesses on litigation, employment matters, contracts, commercial real estate, and risk management in New Jersey and New York.