8 Top Legal Mistakes & Issues Made By Startups

Many start-ups fail to reach their ten-year anniversaries. Much of which has to do with some simple yet avoidable mistakes.

Learning from others’ missteps gets you a better shot at success in the business arena.

Here are some legal mistakes that you need to steer clear of to build your venture to soaring heights:

1. Not having a proper operating agreement

If you are starting a business with co-founders, you need a robust operating agreement. The agreement should stipulate the nitty-gritty details of your business relationship.

It has to have a clear outline of everyone’s role. The founder agreement should address how to share equity, how the day-to-day decisions will happen, the roles and responsibilities of each partner, how to navigate when a partner is not complying with the agreement etc.

It should also give a clear guide of how you will handle selling the business if it ever comes to that. Having solid founders’ operation agreements will help you have harmonious relationships with your partners. It will also help avoid any legal troubles in the future.

2. Not taking enough time choosing a name

When choosing a name for your start-up, you have to consider more than just how it sounds. When you settle on a name you like, research if the name is already in use.

You wouldn’t want to get caught up in domain name problems and copyright infringement issues. Select a name that will not infringe on another business’s trademark.

3. Not paying attention to the legal form of the business

When starting any venture, you need to decide what legal form it will take. The business could either be a sole proprietorship, a general partnership, a C or S corporation, a limited partnership or an LLC.

You are much safer when you start the business as an LLC or corporation. The initial cost of the formation may be higher than that of a partnership or sole proprietorship, but the benefits you will enjoy in the long run are worth the effort.

You can get tax deductions and liability protection in the event of business creditors. Also, it will be easier to raise capital when you need to bring investors on board.

However, it is not all doom and gloom if you started your start-up as a sole proprietorship or partnership. You can convert it to an LLC or corporation further along the road.

However, you will likely incur a lengthy and significantly costly process.

4. Failing to protect intellectual property rights

A common mistake that start-ups make is failing to understand the implications of intellectual property. You have a novel idea. The best thing to protect it is to get patent protection as soon as possible.

You will not have to worry about your innovation getting infringed by your competition. While at it, you may want to consider trademarking your business name and understanding any copyright issues that could arise with any material in your business.

5. Not getting the required licences and permits

Permits and licences necessary for operations differ from business to business. You need to conduct due diligence to avoid unwanted shutdowns and legal costs that could stifle your business’s success.

Understand the different licences and permits you need. What licences are necessary for your industry? Know if you need a health department permit or a state qualification to conduct your kind of business.

Will you require city and county zoning permits and licences? Know the requirements for operation or seek the help of a professional to guide you.

6. Not paying attention to tax considerations

Tax issues can cripple the growth of your start-up significantly. Educate yourself on the different tax issues that you need to understand. Know the tax obligations for your choice of legal entity.

Know what happens if you are a holder of stocks. That could go a long way in making the most of tax savings. You also need to understand the tax incentives available to your nature of business.

Know how to get a tax ID for your company from the IRS. It will make it easier to open a bank account for your business. You do not want to deal with non-remittance legal issues. Procure bookkeeping services to make tax filing more efficient.

A professional bookkeeper will guide you on how to claim your deductions and ensure that you do not overpay. They are your best bet because they clock hours looking into tax law details so that you do not have to do it.

7. Failing to lawyer up sufficiently

Having reliable legal counsel makes a world of difference. It makes it easier to avoid endless legal problems.

Not having an experienced legal counsel in your corner in the name of saving expenses could come to bite you further along the road.

Identify a lawyer skilled in contract law, employment law, intellectual property law, tax laws, executive compensation and benefits law, franchise law etc.

Ask for referrals from friends and family, or consider state bar referrals to get a law firm that can handle the areas of expertise your business needs.

8. Failing to have proper employment agreements and offer letters

You will need staff to grow your start-up. Unfortunately, they may be the ones tanking your venture with legal mistakes. Be on the safe side and have a carefully drafted employment agreement and offer letter.

The employment agreement should be as detailed as it needs to be. It should stipulate the job title and the roles and responsibilities that go with it. It should also explain.

Make it clear if the employee can terminate the relationship without penalty. The agreement should also indicate any stock options available to the employee and the terms of any vesting. Encourage employees to read through it carefully before they sign it.

While still on employees, you need to ensure that you handle and follow the correct procedures when firing them. Consider having an employee handbook that stipulates disciplinary policies for violations. These agreements usually come in handy on a rainy day.

Wrapping up

A lawsuit has the potential to tank even the most innovative start-up. You need to know some legal mistakes that you may want to avoid.

That gets you ready in case of any trouble that could threaten to shake the business that you have worked hard to build.

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Post Author: Abimbola Joseph

Abimbola Joseph is a creative content developer who derives pleasure in encouraging individuals to be the best they can be in all relevant facets of life. She believes that we all have a better version of ourselves which can be leveraged to impact others and make the world a better place. Connect with me on Instagram @abimbolajoe.

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