Top 10 Legal Issues for Startups Pt. 1

Starting a business can be fun and thrilling, especially at the outset. But many of the mistakes that ultimately sink businesses can be made in the early days of the company. Just because your company has only a handful of employees and a sliver of funding or income doesn’t mean your actions and decisions aren’t consequential. Success is as much about avoiding mistakes as it is about the things you do, and while every startup is different, there is a common set of issues that arise that potentially put startups in jeopardy.

“Success is as much about avoiding mistakes as it is about the things you do, and while every startup is different, there is a common set of issues that arise that potentially put startups in jeopardy.” 

1 – Create co-founder agreements.

If you’re working with other founders, you need to have agreements to formalize how the partnership is to work, and what happens if it dissolves. Even if you’re all working together well now, things change, and even the best partnerships go awry, particularly if there isn’t an agreement in place. It’s smart business to plan for the possibility of a business divorce and account for how equity and ownership are to be handled in the event of a departure.

 2 – Failing to choose the correct legal entity.

Although forming a company may seem straightforward, the setup can be tricky, particularly if you’re not familiar with the intricacies of corporate law and regulation. For that reason, some might choose to ignore the issue entirely and continue to operate as a sole proprietorship. This leaves you open to personal liability.  For those that do proceed to set up a company, choosing the wrong type of entity can be expensive and an attorney can save you time and money by evaluating the best structure for your new business.

3 – Not taking IP into account.

Intellectual property (IP) is a huge part of your business; even in the earliest stages. And yet too many companies don’t take IP seriously, either putting it off until later or forgetting it exists entirely. Patents, trademarks, and copyrights protect against having your IP misused by others, and any trade secrets you have should be closely guarded as well.

Taking IP seriously also means avoiding infringing upon others’ IP as well. There’s nothing to derail a new company quite like a costly infringement lawsuit, so ensure that you have an attorney assist with your IP planning.

4 – Not having employee agreements in place.

In the free and easy early days, it’s probably quicker and easier to bring on new team members with a handshake and a start date. But the employer-employee relationship can become problematic without the requisite paperwork outlining responsibilities and obligations. A good employment agreement covers not only job title, responsibilities, and salary but also expectations regarding privacy and security of sensitive information as well as ownership of IP created while at the company and non-compete clauses in event of departure. Without that, a former employee could take what they know and what they’ve created to a competitor, leaving you with little recourse.

5 – Failing to get the proper licenses or permits. 

Your company may need business permits and seller’s permits to operate, as well as the requisite tax permits to collect and pay sales taxes plus payroll taxes. And depending upon your state there may be a litany of other requirements to be met before you can officially do business without risking fines and penalties, so it’s best to do your research.