When it comes to starting a business, excitement can run high. Entrepreneurs are ready to jump in and to get moving with the end goal – long-term success – in mind. Sometimes this dream makes it easy to overlook certain steps that could be critical, especially relating to legal issues. Check out these six legal mistakes your startup can’t afford and take appropriate action to avoid them.
1. Not Making Clear Agreements Up Front
In many cases, starting a business requires individuals like investors and co-founders able to contribute to the startup to help get everything moving in the right direction. The problem becomes apparent when the agreements relating to these relationships are not clear.
A few questions to consider and to get in writing before proceeding with any partner, co-founder or investor include:
- What percentage of the company is assigned to each individual?
- Who will be investing in the company? How much? On what time schedule?
- What are the expectations going forward? What are the roles and responsibilities of each party?
- Is ownership in the future subject to any vesting or continued participation in the company and its operations?
- If one partner drops out, what happens to that individual’s shares? What are the details?
- Will partners and founders be entitled to specific salary amounts? How will it be determined? How and when will it change? What are the benchmarks?
- What decisions can each individual make on his or her own, what requires a vote, and what is the breakdown?
- Can certain partners or founders choose to remove others? What is the process?
- Who will decide when it’s time to sell the business?
- What’s the goal for moving forward? What is the vision of the company for the future?
2. Not Starting the Company as the Correct Entity
From the start, founders of businesses must decide what legal form the business will operate as. When this is not considered up front, higher taxes, liabilities and penalties may exist that could have been avoided by doing the proper research and working with a business law attorney in the beginning.
Founders can decide between sole proprietorships, general partnerships, C corporations, S corporations, LLCs and limited partnerships. Each of these has different requirements and is formed by filing different documents. Costs vary according to the structure chosen. It’s important to understand goals and to act accordingly from the start.
3. Not Creating Proper Employment Documents
Employment documents and documentation are critical for ensuring startups are operating legally and that employees are entitled to their rights under the law. To avoid this error, having a core set of documents on file that are signed by all employees is essential.
These documents should include:
- Stock Options – Notice of Stock Option Grants, Option Agreements and Stock Incentive Plans.
- “At-Will” employment offer letters.
- A professionally written employee handbook that outlines policies.
- Confidential information, non-disclosure agreements and/or inventions assignment agreements.
- USCIS Form I-9 and IRS Form W-4
- Benefit forms that outline any benefits available for employees and family members – this would include investment opportunities, the details of health insurance and any other benefits available to employees.
4. Not Covering Workplace Injuries
Injuries happen; while they can be prevented, there’s no way to completely guarantee they will not occur. Even in office settings, various injuries are possible. In fact, back pain is one of the top causes of disability around the world. If your office setting or industry could contribute to something as common as back pain, providing workers’ compensation insurance is critical. By covering your employees, you’re protecting your business.
5. Not Protecting Intellectual Property
If your business exists because you developed a unique process, product, technology or even service, ensuring your creation is protected is important. There are multiple ways to protect intellectual property. Some ways include: patents, copyrights, trademarks, service marks, trade secrets, confidentiality and non-disclosure agreements and more. Protecting what your business is built upon is one of the most important actions to take from the start.
6. Not Researching the Name
Sure, some business owners and startup founders have a name in mind from childhood – something they’ve hashed through that they cannot imagine not using when forming a business. However, when not properly researched, trouble could ensue. Even if it’s not intentional, trademark infringements or domain name issues can arise that can cause costly battles that stop a business in its tracks.
To be sure your company name is protected, run an online search to see if there are other companies operating under the same name, consider checking into the U.S. Patent and Trademark Office website, check the LLC records in the state in which your company will be operating, run a domain search on GoDaddy, consider using a lawyer to run a professional trademark search and put thought into other options.
Starting a business can and should be an exciting time. Avoid the pitfalls listed above for best results.
Note: I am not a lawyer and this advice should not be substituted for professional legal advice. If you desire professional law-related advice, please contact a lawyer.
Image by Craig Garner