Top 10 Legal Issues for Startups Pt. 2

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.” 

6 – Not having contracts. 

If you’re operating a professional business, you need to have written contracts for customers, clients, and vendors. Handshakes are for movies; verbal agreements are all well and good, and emails documenting your accord are better than nothing, but to truly protect yourself and your company, use a written contract that spells out clearly the terms for each side and covers contingencies and potential disputes. Without a contract, every point of the agreement, and even the agreement itself, is left open to dispute based upon the understanding of a conversation. An attorney can make sure that you are covered here.

7 – Treating contractors like employees. 

It might seem an arbitrary distinction that is up to you as the boss, but it’s important to remember that non-employees are non-employees and conversely employees must be classified as employees. Seek professional help from an attorney or accountant to understand these classifications. There are serious implications with respect to taxes and state employment remittances for unemployment for employees versus contracts. Also, stick to the letter of the contract in terms of the work and hours you’re asking of contractors (and make sure that the contract gives you ownership of the work they create for your company).

8 – Not considering taxes.

No one likes taxes, particularly in dealing with the complex web of taxes involved in running a business with employees. Businesses that are making sales, paying employees, and issuing stock options are looking at a number of different taxes, and without the right planning and accounting, could face an unexpected tax bill, or, if handled improperly, potential penalties or fines. Be aware of all the requisite taxes involved, and if you’re uncomfortable with keeping the requirements straight, find a good bookkeeper plus a business attorney or accountant to help.

9 – Dismissing paperwork and documentation.

There’s no surer way to find yourself in trouble than lax documentation standards. Even if you’re somewhat sloppy with your recordkeeping in your personal life, business documentation needs to be on point. Every transaction is significant, and any discrepancy is potentially problematic for tax authorities and reporting standards. Even in the early days when the company is small enough that nothing feels significant, keep good accounting records, all stock and equity transactions, and policies to prevent a headache further down the line.

10 – Not seeking legal support from the start.

Perhaps the biggest mistake you can make is failing to seek out professional help. The startup life is by definition cheap and cheerful, but taking the budget-conscious approach to serious questions or problems doesn’t really work when a mistake on your part could lead to an even bigger and more expensive issue later. A lawyer can help you to make the right decisions and sidestep any potential issues that might sink your startup before it even has a chance to get going.