5 Legal Mistakes Small Business Owners Make in Texas
- The Spencer Law Firm
- 4 days ago
- 3 min read
Running a small business in Texas comes with big opportunities—but also big legal risks if you're not careful. A single contract clause, missed deadline, or handshake deal gone wrong could lead to lawsuits, tax penalties, or even business closure.
Here are 5 of the most common legal mistakes Texas business owners make—and how to stay protected.
Not Forming the Right Business Structure
The Mistake:Many entrepreneurs launch as sole proprietors without realizing the legal and financial risks involved. Without an LLC or Corporation, your personal assets (home, car, bank accounts) could be on the line if your business is sued.
Why It Matters in Texas:Texas is a business-friendly state—but that doesn’t mean it’s lawsuit-free. Choosing the wrong structure can cost you in liability exposure and taxes.
What to Do:
Consult a business attorney before you register your company
Consider an LLC or S-Corp for liability protection and tax benefits
Separate your personal and business finances immediately
Explore: Business Formation Services in Texas
Using Verbal Agreements Instead of Written Contracts
The Mistake:Trusting handshake deals or casual email confirmations can be a legal disaster waiting to happen. Without written contracts, it’s hard to enforce your rights—or defend yourself.
Real Example:A Houston bakery owner hired a freelance designer without a contract. When the final work was unusable, she had no legal grounds for a refund.
What to Do:
Always use written contracts, even with friends or family
Include payment terms, timelines, deliverables, and dispute clauses
Have a lawyer review contracts before signing big deals
Ignoring Employment Laws & Misclassifying Workers
The Mistake:Calling someone a “contractor” doesn’t make it so. Misclassifying employees as freelancers can lead to tax issues, wage claims, and legal penalties.
Texas Law Says:Even one misstep in payroll, overtime, or classification can trigger audits or lawsuits from the Texas Workforce Commission or IRS.
What to Do:
Know the difference between W-2 employees and 1099 contractors
Use clear contracts for independent workers
Maintain accurate time-tracking and payroll records
Tip: Always provide offer letters or employment agreements.
Overlooking NDAs and Non-Compete Agreements
The Mistake:Many small business owners delay or avoid using Non-Disclosure Agreements (NDAs) and Non-Competes—until a trusted employee leaves and takes clients with them.
Why It Hurts:Without protection, your trade secrets, client lists, and business processes are vulnerable.
What to Do:
Use NDAs with employees, contractors, and collaborators
Draft enforceable non-competes that comply with Texas law
Include confidentiality clauses in all service contracts
Need help drafting these? Talk to our legal team
Failing to Plan for Business Disputes or Dissolution
The Mistake:Partnerships often begin with excitement and verbal understandings—until things go south. Without a Partnership Agreement or Operating Agreement, breakups can be messy, expensive, and bitter.
True Story:Two co-owners of a local Houston fitness studio clashed on expansion plans. Without an agreement in place, the fallout led to a lawsuit and the studio’s shutdown.
What to Do:
Create a dispute resolution clause in your partnership agreement
Plan for exits, buyouts, or silent partner roles in writing
Revisit agreements annually as your business grows
Learn More: How to Avoid Partnership Disputes in Texas
Final Thoughts: Don’t Let Legal Mistakes Derail Your Business
Most legal mistakes happen because business owners don’t know what they don’t know. But the good news? These issues are 100% preventable with the right guidance.
Want to protect your business before a problem arises?
📞 Call The Spencer Law Firm today on (713)-961-7770 for a free consultation.📍 Serving Houston entrepreneurs and small business owners across Texas.
About the Author
Ashley M. Spencer, Esq.
Founding Partner & Business Law Attorney, The Spencer Law Firm
University of Texas School of Law | Bachelor of Arts
Loyola University of New Orleans | Juris Doctor
💼 15+ Years of Experience
Know About Ashley Spencer
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