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 November 03, 2020

Top 10 Legal Issues for Startups

Small business owner placing Open sign on shop door

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.

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.

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.

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