Top 8 Compliance Pitfalls New Business Owners Should Avoid

Starting a new business is exciting, but overlooking compliance can be costly. Whether you’re forming an LLC or hiring your first employee, staying compliant with laws and regulations is crucial to your success.

It’s not just about paperwork — non-compliance can lead to hefty fines and lawsuits and even force you to shut down your business. That’s why every new business owner needs to pay attention to legal requirements from the start.

New business owners often miss key compliance areas. Some common mistakes include failing to register the business correctly, ignoring local and state licensing requirements, misclassifying employees, and forgetting about tax obligations.

These oversights might seem small, but they can lead to significant issues down the road.

In this article, we’ll outline the top compliance pitfalls to avoid as a new business owner. Whether it’s protecting customer data or keeping up with tax deadlines, understanding these risks will help you build a strong foundation for your business.

By avoiding these common mistakes, you can focus on growing your company while staying compliant.

And if you need any help with business formation and staying on top of compliance?

Explore doola for easy business setup and total compliance solutions.

1. Failing to Register the Business Correctly

Starting a business involves more than just coming up with a great idea. One of the first and most important steps is registering your business correctly.

How you register will determine how your business is taxed, the level of personal liability you’ll have, and the paperwork you’ll need to file in the future.

Choosing the Right Business Structure

Choosing the right business structure is crucial. The most common options are Sole Proprietorship, Limited Liability Company (LLC), and Corporation. Each has its own advantages and drawbacks.

• A Sole Proprietorship is the simplest to set up but doesn’t offer protection for your personal assets.

• An LLC provides flexibility and shields your personal assets from business liabilities.

• Corporations are more complex but are ideal for larger businesses planning to issue stock.

The structure you choose will impact your taxes and your personal liability. That’s why it’s essential to weigh your options carefully.

Common Mistakes to Avoid

Many new business owners make the mistake of not registering in the correct state or failing to file the required paperwork. If you’re operating online or across state lines, you may need to register in more than one state.

Another common error is rushing to register without fully understanding the implications of the structure you choose. Registering as the wrong entity can lead to unexpected tax bills or personal liability if things go wrong.

Startup Legal Requirements

To avoid legal issues, take the time to understand what entity type best suits your business.

A Sole Proprietorship might be perfect for a freelancer, while an LLC might be better for a small retail store. A corporation could be the best fit for those aiming to raise significant capital.

Choosing the wrong entity can lead to fines, higher taxes, or even lawsuits. Research the pros and cons of each structure and consider seeking advice from professionals.

What To Do About It?

Registering your business properly involves a few key steps.

First, choose the right structure based on your business’s needs. Second, make sure you file with the appropriate state and local agencies. You may need to file Articles of Incorporation for an LLC or Corporation. If you’re operating in multiple states, ensure you register in each state where you conduct business.

Also, don’t forget to apply for an Employer Identification Number (EIN) from the IRS, which is often required for tax purposes.

By taking the time to register your business correctly or hiring formation experts like doola to do it for you, you’ll avoid many of the legal and financial headaches new business owners often face.

2. Ignoring Local, State, and Federal Licensing Requirements

One of the biggest mistakes new business owners make is ignoring licensing requirements. No matter what type of business you’re starting, you’ll need proper licenses and permits to operate legally.

These requirements ensure your business complies with local, state, and federal laws. Failing to secure the proper licenses can lead to fines, penalties, or even being forced to shut down.

A common issue is skipping research on industry-specific licenses. Many business owners assume a general business license covers everything.

However, specific industries — like food service, healthcare, and construction — have strict licensing requirements. Operating without these permits can be disastrous.

For example, running a restaurant without a food handler’s permit can lead to immediate closure by the health department.

Construction companies might also need multiple permits for zoning, safety, and environmental compliance. These are just a few examples of industries that demand strict licensing before you can even begin operations.

What To Do About It?

Research is critical to avoiding these pitfalls. Start by checking with local city or county offices to understand what licenses are required. Then, investigate state and federal requirements, mainly if your business operates across state lines.

You can also hire a legal professional or use online resources to help identify all necessary permits and licenses for your industry.

Staying compliant protects your business from legal trouble and keeps operations running smoothly.

3. Overlooking Employment Laws and Worker Classification

Another major compliance mistake new business owners make is misclassifying workers. It’s crucial to understand the difference between employees and independent contractors.

Employees are entitled to benefits, minimum wage, and overtime pay, while contractors are not. Misclassifying workers can lead to hefty fines, back pay, and lawsuits.

Common mistakes include treating all workers as contractors to avoid paying taxes, not tracking hours for employees, or ignoring state and federal wage laws. These errors can violate critical regulations like the Fair Labor Standards Act (FLSA), which sets standards for wages and overtime.

What To Do About It?

You’ll also need to follow Occupational Safety and Health Administration (OSHA) guidelines to ensure a safe workplace.

To stay compliant, workers should be correctly classified based on their roles and work habits. Contractors typically work independently and control how they do their jobs, while employees follow your instructions and work hours.

Review worker classifications regularly, consult with legal experts, and keep detailed records. These steps will help protect your business from costly penalties and lawsuits.

4. Ignoring Data Protection and Privacy Laws

Complying with data protection laws like GDPR (General Data Protection Regulation) and CCPA (California Consumer Privacy Act) is crucial for any business.

These laws are designed to protect customers’ personal information, giving them control over how their data is collected, stored, and used. Failure to follow these rules can result in hefty fines and damage to your business’s reputation.

New business owners often mishandle customer data. This could involve collecting too much information or storing it improperly.

Another common error is not implementing adequate cybersecurity measures, which can leave your business vulnerable to data breaches and hacks. A single security breach could cost you financially and in customer trust.

Remember, as a business owner, it’s your responsibility to safeguard customer data. You need to know what personal information you collect and ensure it’s used responsibly.

GDPR and CCPA require you to be transparent about how you use data, give customers control over their data, and notify them in case of a breach. Ignoring these rules could land you in legal trouble.

What To Do About It?

To stay compliant:

• Adopt best practices for data privacy.

• Protect customer data with encryption and secure passwords.

• Limit access to sensitive information and regularly update your security protocols.

Also, create clear privacy policies and communicate them to your customers. Make sure they know how their data is being used and how they can opt-out if they choose.

5. Failing to Understand and Comply with Tax Obligations

Taxes are one of the most confusing areas for new business owners, but getting them wrong can be costly.

You need to understand your tax obligations at the local, state, and federal levels. This includes paying income tax, sales tax, and sometimes special taxes depending on your industry and location.

Many new businesses misreport income, either by underreporting or overreporting, which can lead to penalties or audits.

Failing to collect and remit sales tax is another common mistake, especially for businesses that sell goods or services online. Missing important filing deadlines can also result in fines or interest charges that quickly add up.

Every business must file certain forms. At the federal level, you’ll need to submit IRS forms such as the 1040, 1120, or 1065, depending on your business structure.

State tax requirements vary, but many states require you to collect sales tax if you sell physical products or services. It’s crucial to check what your state and local governments need for proper compliance.

What To Do About It?

To avoid tax issues:

• Stay organized with your financial records.

• Use accounting software to track income, expenses, and tax liabilities.

• Set aside money for taxes and pay estimated taxes quarterly if needed.

Consider working with a tax pro like doola to make sure you’re meeting all requirements and staying ahead of deadlines.

6. Neglecting Environmental and Industry-Specific Regulations

New business owners often overlook environmental and industry-specific regulations. This mistake can lead to hefty fines, legal action, or even business shutdowns.

Understanding the regulations that apply to your specific industry is critical for ensuring your business stays compliant and avoids unnecessary risks.

For instance, many new business owners fail to research the environmental laws and specific rules that govern their industry.

Some common errors include:

• Not following environmental protection laws.

• Ignoring guidelines.

• Violating air and water quality standards.

These mistakes are especially costly in industries like manufacturing or agriculture.

Another issue is assuming these regulations don’t apply to smaller businesses when, in reality, many rules apply regardless of business size.

What To Do About It?

To stay compliant, regularly review the regulations that apply to your industry. Sign up for updates from relevant government agencies, such as the Environmental Protection Agency (EPA) or industry-specific bodies.

Consider doola’s Total Compliance bundle to help you navigate these rules. You can also attend industry webinars, join local business groups, or subscribe to newsletters that highlight regulatory changes.

Remember, staying proactive is key to avoiding costly compliance issues.

7. Failing to Develop and Follow a Compliance Program

A compliance program is key to keeping your business in compliance with the law. It helps ensure your company follows regulations, protects your employees, and avoids costly penalties.

Without a structured approach, it’s easy to miss essential legal requirements or industry standards. A compliance program creates a roadmap for ongoing regulation adherence, saving your business from avoidable mistakes.

Common mistakes include skipping internal audits, not regularly training staff, and keeping poor documentation. These oversights can leave you vulnerable to lawsuits and regulatory fines.

What To Do About It?

To avoid these risks, you need a formal compliance program. It helps you identify and fix issues before they escalate into legal problems. Regular audits catch errors early, while employee training keeps your team up-to-date on current laws.

Start by documenting policies, conducting routine checks, and offering regular training. Designate someone to oversee compliance efforts and track changes in laws that apply to your industry.

8. Not Keeping Up with Changes in Laws and Regulations

Compliance laws are constantly evolving. Whether it’s tax codes, employment laws, or data privacy regulations, new rules can impact how you run your business.

Remember, staying compliant isn’t a one-time task — it’s an ongoing process.

Many business owners set up their compliance strategies once and forget to revisit them. They assume what worked last year will work this year. This can lead to costly fines or even legal trouble when regulations change.

What To Do About It?

To avoid these pitfalls, regularly review local, state, and federal laws relevant to your business. Subscribe to legal updates, join industry associations, or consult with a legal advisor.

Stay informed and make sure your business adapts to the changes in the rules to stay compliant.

Handle Your Business Compliance with doola

Staying compliant can feel like a full-time job. It’s easy to get overwhelmed between taxes, licenses, and a million other rules. But don’t stress! doola is here to help.

We know how tough it is to keep up with all the changes, so we’ve made it our mission to simplify business compliance. Our Total Compliance package covers everything from formations to taxes and licenses. You get your dedicated expert who knows the rules inside and out.

Ready to ditch the compliance headache? Learn more about doola’s Total Compliance package or book a free consultation with one of our experts. Let us handle the paperwork while you focus on growing your business!