17 essential legal tips for small businesses and side hustles
Running a small business or side hustle comes with legal pitfalls that can derail even the most promising venture. This guide covers seventeen critical areas where entrepreneurs commonly make costly mistakes, drawing on insights from legal and financial experts who work with small business owners daily. From proper worker classification to intellectual property protection, these practical tips help business owners establish solid legal foundations without getting overwhelmed by complexity.
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- Make Key Terms Clear on Paper
- Complete Local Registration and Compliance
- Seek Timely Counsel on Foundations
- Hold Your Website to Accessibility Standards
- Adopt a Strong Service Contract
- Classify Hires Correctly from Start
- Choose the Best Legal Structure
- Lock Down Intellectual Property Ownership
- Secure Your EIN Right Away
- Label Roles Accurately at Onset
- Maintain Precise Time and Wage Records
- Protect Personal Assets with Proper Setup
- Prioritize Written Agreements for Every Relationship
- Set Aside Funds for Taxes
- Form an Entity and Separate Finances
- Spell Out Scope and Payment Upfront
- Get Vetted Fiscal Guidance Early
Make Key Terms Clear on Paper
I would advise putting clear, written policies and agreements in place early, even if you’re starting small or working with friends or family. When you have written agreements that outline things like pay, expectations, confidentiality, and ownership of work, you can prevent misunderstandings from turning into costly legal disputes as the business grows. Oftentimes, new entrepreneurs will wait until there’s a problem to formalize these issues, but by then it’s usually too late.
The Small Business Administration website is a great resource to use when you’re creating your policies and agreements. It offers practical guidance, templates, and compliance checklists on hiring, workplace policies, and employment obligations. It’s also user-friendly, making it easy for business owners to understand their legal responsibilities so they can build a strong foundation from the very beginning.
Complete Local Registration and Compliance
One important legal step for anyone starting a small business or side hustle is ensuring proper business registration and compliance with local laws and regulations. This is critical not only for operating legally, but also for protecting personal assets and reducing the risk of future disputes. One reliable resource for navigating these requirements is the Small Business Administration (SBA) website. The SBA offers comprehensive guides, checklists and tools covering business registration, licensing, tax obligations and compliance essentials. Leveraging these resources helps entrepreneurs make informed decisions and avoid costly mistakes. By taking the time to set up your business correctly from a legal standpoint, you create a strong platform for sustainable growth, credibility and long-term success.
Seek Timely Counsel on Foundations
One essential legal tip for anyone starting a small business or side hustle is to get early professional legal feedback on your foundation. Governance structures, operating agreements, and client contracts can hide risks and gaps that can fracture into major holes rather than provide solid legs to scale on. AI tools can be helpful for drafting initial frameworks and thinking through scenarios, but they are not a substitute for experienced legal counsel. A good attorney can spot gaps, edge cases, and unintended consequences in MSAs, SLAs, and SOWs that are easy to miss when you are moving fast or wearing every hat.
A helpful resource is the U.S. Small Business Administration, which offers clear, plain-language guidance on business structures, contracts, and compliance. It is a solid starting point before engaging legal counsel and helps founders ask better questions instead of guessing.
Hold Your Website to Accessibility Standards
One essential legal tip for anyone starting a small business or side hustle is this: your website is a legal exposure, not just a marketing asset.
I didn’t learn this academically — I learned it by going through it myself.
Many business owners assume that hiring a good designer or using a reputable platform automatically handles compliance. In reality, if your business operates a public-facing website, you are responsible for everything on it — including third-party software, booking systems, forms, plugins, and embedded tools.
A commonly overlooked area is website accessibility under the Americans with Disabilities Act (ADA). ADA compliance isn’t about design quality or intent; it’s about whether people with disabilities can reasonably access and use your site. Issues such as color contrast, form labels, navigation structure, and image descriptions are common problems — even on professionally designed websites.
From a business perspective, the most important insight is that compliance is an ongoing process, not a one-time fix. Accessibility work is iterative: you audit, correct issues, recheck, and repeat as your website evolves.
One practical way to build awareness is to use accessibility scanning tools such as WAVE, which visually highlight potential issues and help owners recognize patterns rather than guess. For broader compliance needs, including privacy policies, terms, and consent management, automated policy tools can help keep websites up to date as they evolve.
The takeaway isn’t fear — it’s awareness. When business owners understand their responsibilities early, they can build systems that protect their company, improve the user experience, and grow with confidence rather than react too late.
Adopt a Strong Service Contract
Use a clear, detailed service agreement from day one, even if you’re working with friends or your first few clients. Your agreement should spell out the exact scope of services, deliverables, timelines, payment terms, and what’s not included. Just as important are protection clauses like limitations of liability, dispute resolution, and termination rights. A well-written agreement aligns expectations on both sides and prevents small misunderstandings from turning into expensive disputes later. We did this very early on, and it helped prevent potential headaches. The SBA provides intuitive guidance and templates on contracts and legal basics, which is a great starting point.
Classify Hires Correctly from Start
My top legal tip for small business and startup founders: if you hire professionals as part of that business, make sure you’re classifying them correctly, and that this classification remains true as your business grows. This is one area where small businesses frequently make mistakes that can have significant legal and financial consequences. Whether someone is classified as an exempt employee, nonexempt employee, or independent contractor directly affects tax withholding, overtime and benefits eligibility, and the business’ responsibility regarding unemployment insurance and workers’ compensation. If you misclassify workers, this could result in penalties, liability for back pay, a government audit, or even a lawsuit, all of which can be quite pricey and cause significant disruption to your business.
We see a few common mistakes in this area when working with small businesses. For instance, they may hire a “contractor” but require them to work set hours that the business determines, or dictate where and how they do their work. Once you place these kinds of restrictions on someone, they become an employee, not a contractor. Another common issue is that a contractor is correctly classified when they’re hired, but shifts into more of an employee role as the business grows and is not properly re-classified. Even when it’s accidental, misclassification can result in the same penalties and issues, so it’s critical to get it right.
The classification rules can get complicated. I strongly recommend that business leaders consult with a lawyer before they make their first hires, even if they are only utilizing occasional freelance talent. There are also helpful online resources, like the Small Entity Compliance Guide from the U.S. Department of Labor or the Employee or Self-Employed guide from the Canadian Revenue Agency.
Choose the Best Legal Structure
One of the first legal issues you need to think about as you start your own business or side hustle is organizing your business properly. The type of legal entity you choose (e.g., an LLC, S-corp, etc.) will influence your exposure for your personal assets, tax implications, and ability to fundraise for the business. By structuring it correctly from the beginning, you can protect your personal assets and create a foundation for growth.
The U.S. Small Business Administration (SBA) is another helpful resource for the legal aspects of starting a business. They provide information regarding various aspects of business, including legal compliance and general business requirements. The SBA also has many resources to help guide you in determining what type of legal structure best fits your needs for your business.
Lock Down Intellectual Property Ownership
A key legal step that many people miss when they are starting a small business or side hustle is to get the ownership of the intellectual property down in writing before any money is exchanged.
People tend to believe they own the business name, logo, website, or product idea because they paid for it or came up with the idea. But in legal matters that assumption is incorrect. Unless there is a written agreement to the contrary, designers, developers, photographers, and partners retain their ownership. I have seen founders lose their brand after paying $2,500 for a logo because the designer took the logo and said he/she owned copyright. In another situation, the founder of a software company lost software investor money after a former contractor was able to prove a 40% ownership of code.
Intellectual property determines who is allowed to earn, to license, to sell, or to close off your business. If ownership isn’t written down, a contractor can put a halt to growth, demand royalties, or force a new brand after years of work. A basic IP assignment agreement tends to cost $400 to $800 and insures assets that have the potential to generate income for 10 or 20 years.
The best source that I recommend is the Canadian Intellectual Property Office Small Business Guide. It explains trademarks, copyrights and ownership in simple terms and demonstrates how to record rights before the disputes occur, which is when really legal protection comes into play.
Secure Your EIN Right Away
Get an EIN from the IRS immediately after you name your business. New starters are skipping this free step and scrambling when the pressure by banks or vendors asks for tax ID proof. We’ve watched as sole operators have stalled launches over missing numbers and LLC’s hit the ground running. Banks don’t allow you to have an account without it and sites such as PayPal freeze your payouts. So grab that nine-digit shield first and paperwork flows smooth everywhere.
SBA.gov’s 10-step start-up guide breaks down legal basics in a way that’s easy and free for anyone jumping in. Side hustlers who don’t have time to scroll through random blogs pull the instructions for setting up an entity and getting an EIN. We push thousands of SMEs there every year because it nails compliance order every time. Starters anywhere fit their state rules quick and evade the first year fines by means of those exact walkthroughs.
Label Roles Accurately at Onset
One tip I would give to anyone starting a small business or a side hustle is to classify workers correctly from the start. Sometimes, new businesses misclassify their employees as independent contractors while controlling their schedules, pay, and daily tasks. For example, once an employee came to me after working for a small business where they were labeled as an independent contractor. However, they were required to strictly follow a set schedule assigned by the company. When the employee raised their concern about unpaid overtime, they were terminated shortly after. I handled the case legally, which exposed the business to wage claims and tax issues. This was very detrimental to the business’s reputation and consequently led to its failure. My experience highlights that it is important to follow basic employment laws from the very beginning, even if the business is informal or just a startup.
Maintain Precise Time and Wage Records
If you have employees from the start, it will be important to track their hours and pay. Having records of hours worked and amounts paid is not only required by the law, but is critical to defend any claims that you were not paying employees properly. New York also requires most employers to provide paid family leave as well as workers’ compensation coverage once you have employees. A vital resource for New York-specific guidance is the New York State Department of Labor’s Employer Resources page, which provides compliance checklists, posting requirements, and links to all forms for small businesses and startups as well.
Protect Personal Assets with Proper Setup
The most important legal advice a person can receive when starting a small business or side hustle is to keep your personal and business liabilities separate since the very beginning by selecting the appropriate legal structure (such as an LLC or corporation) and opening a separate business bank account — not only do you secure your personal assets, but also establish credibility as you develop. This step is overlooked by many founders, and they come to regret it later when tax, contract, or disagreement arises. The U.S. Small Business Administration (SBA) website is a very trustworthy source of information on the same since it explicitly and clearly provides current guidance on business structures, registration, licensing, and compliance in simple language accessible to non-lawyers.
Prioritize Written Agreements for Every Relationship
Consider contracts your first order of business in the law department. Put every key relationship in a simple written agreement that spells out scope of work, deliverables, pricing, payment terms, ownership of any work produced, and what happens if either side wants to end the relationship or if something goes wrong.
For practical assistance, you can use your government’s official small business or commerce website as an initial resource. Those websites are often giving you sample clauses and checklists and explaining in layman’s terms “what do you need to have in a basic contract for freelancers, side hustlers, and small companies.”
Set Aside Funds for Taxes
Jumping in from an accountant’s view:
Not putting money aside for tax as they go.
We see this all the time: people earn well during the year, spend what comes in, and then panic when the tax bill arrives. Saving a percentage of income regularly means there are no nasty surprises! And then it gives you far more control over your cash flow in the long-term.
Form an Entity and Separate Finances
In my years in the field, I’ve seen people start side hustles without separating themselves from business. You have to pick a structure such as an LLC in order to keep your house and car safe if things go south. Proper entity formation is a shield between your personal life and high-risk business liability. Separation of the bank accounts prevents creditors from taking your family’s wealth away in a lawsuit.
Skipping this step is a mistake that haunts many small business owners. My experience in courtrooms is that judges have little mercy on those who mingle their funds. That’s why I tell every new entrepreneur to get their paperwork in order before they sell one product. It sounds like a lot of additional effort, but the protection is with you for life. Most people do not worry about these rules until they get sued.
I’ve watched families lose it all because they thought an LLC was for the big corporations. Actually, it is the only way to sleep soundly when your revenue starts to go up.
My years in the field indicate that, in starting out, people often get bogged down in complicated local laws. You may be the kind of person who values efficiency, but looking for answers on random forums is a waste of your energy. The Small Business Administration offers free tools that explain all the aspects of the start up process in plain English. We’re seeing the best results when owners are following these vetted guides rather than guess their way through tax filings.
I have found the best place to get accurate information on specific permits for your area is at local clerk offices. Most entrepreneurs do not pay attention to these small offices because they desire a digital shortcut that does not exist. Actually, a call to your local clerk can save you thousands in fines for failing to file a simple document. Based on my years in the courtroom, there is nothing better than getting your facts directly from the source.
Spell Out Scope and Payment Upfront
One essential legal tip: put your scope and payment terms in writing before you start work.
It doesn’t need to be fancy. A simple agreement (even one page) should cover:
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what you’re delivering (and what’s out of scope)
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the price and when payment is due
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late fees or what happens if payment is late
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what happens if the client cancels
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who owns the work product (if relevant)
This protects you from the most common early-stage problems: scope creep, “I thought that was included,” and clients who delay payment because nothing was clearly agreed to.
Second, separate the business from your personal life as soon as money starts moving: use a dedicated bank account and keep business income/expenses out of personal accounts. That separation helps if there’s ever a dispute, and it makes taxes and recordkeeping far easier.
Resource: The U.S. Small Business Administration (SBA) has clear guidance on choosing a business structure and the steps to start a business, including registrations and compliance basics. It’s a solid starting point written for non-lawyers.
Get Vetted Fiscal Guidance Early
Taxes are not as complicated as you think. But make sure you get your tax advice from a reputable SaaS tool or hire a licensed tax professional and not some dude on Reddit or the guy that says form an LLC and write off all your expenses. Tax issues can become an extra worry real quick if you’re not set up right out the gate. You will already have enough to worry about in your start up phase. The best resource is to ask an AI or Google and thoroughly vet the answers it gives you.
