5 Legal Mistakes Your Startup Is Making Today
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Tremendous work and planning are involved in the formation of a startup. Most small companies begin with an innovative idea and one or more people who are passionate about it and then grow from there. But jumping into business too quickly can end up costing you in more ways than one. If you’re a new business owner, or if you’re thinking of becoming one, learn how to avoid five of the most common blunders made by startup companies.
1. Neglecting to Incorporate
There are fees involved when you incorporate your startup at the onset, but they’re typically less than the cost to convert a sole proprietorship or partnership to LLC status later on. And operating as a limited liability corporation is a good idea because:
- It protects the founder and company investors from litigation from creditors.
- It provides additional tax breaks and savings.
- It makes raising capital easier.
Neglecting to incorporate at the onset can cost both you and your investors money by exposing your personal assets to creditors who want to sue. And while you can always convert your startup status at a later date, the conversion fees can be formidable. Late incorporation can also ensnarl you and your partners in red tape with the IRS over the price of stock sales.
2. Not Setting Boundaries Regarding Who’s Vested
It your startup is a joint collaboration between two or more founders, it’s important to lay down the rules of vesting in the very beginning. Otherwise, your partner who gave up early in the game and moved on to other pursuits is entitled to the same amount of shares as those who later hung around for years — helping to sculpt and build the company.
3. Listening to Inexperienced Legal Advice
It’s imperative not only that you seek legal counsel before forming your startup, but that you seek out someone who’s experienced in the finer points of owning and running a company. Rather than retain the services of a friend of a friend, hire a lawyer or firm who specializes in one or more of the following areas:
- Corporation Law
- Tax Law
- Employment Law
And if you find that you’re not happy with the level of knowledge that your legal counsel has regarding startup laws, don’t hesitate to end the relationship in search of someone who’s a better fit. Having the right, experienced attorney on board from the beginning can save you, your partners, and your investors from significant losses that first year and beyond.
4. Choosing the Wrong Company Name
While you need a good, strong name for your startup, one that easily reflects the services you provide, this doesn’t mean you can infringe on another company’s identity. If you inadvertently pick a name, logo, or slogan that’s already in use by another organization or that’s too similar to one used by someone else, you leave yourself open to litigation for trademark infringement. And that doesn’t just apply to your brick-and-mortar storefront. Using domain names or images on your website that could easily be mistaken for another company can cause legal problems too.
5. Failing to Protect Intellectual Property
Most successful startups begin with a new, groundbreaking idea or product, and failing to protect it can result in significant financial losses. When you invent a product or create an original work, you have to take the means necessary to protect it. You can do this in a number of ways:
- By Pursuing a Patent
- By Obtaining a Copyright
- By Requiring Employees to Sign Confidentiality Agreements
Protect your investment, your innovative ideas, and your groundbreaking technology by securing their ownership through legal channels.
If you thoroughly understand the steps necessary to protecting yourself, your partners, your investors and your brand, that all-important first year will fly by much more smoothly. And once you survive your first year, it only gets easier from there. Be a smart new business owner, and follow these tips to ensure that your startup comes out of the gate with the best possible odds.
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