Top 5 Legal Risks that Startups Can Avoid

When starting your business, it is best to begin with a firm legal foundation to help you avoid pitfalls along the way. Here are the top 5 legal factors to consider when starting your business.

When starting your business, it is best to begin with a firm legal foundation to help you avoid pitfalls along the way. Establishing a business takes a lot of effort, time and potentially money. There are several steps that should be taken before you even open for business, some of which you’ll want to get right from the start. 

Be cognizant of the legal issues surrounding your business (you have them even if you don’t realize them, just because you aren’t getting sued doesn’t mean you don’t have legal considerations), and address them proactively. Legal issues faced by startups vary based on the specific company, industry and location, but generally there are some common concerns all business owners should look to address. If you’re a small business owner, the last thing you want is to overlook something that could have been handled upfront and limited the risk you’re taking. 

Here are the top 5 legal factors to consider when starting your business:

Get Your Business Structure Established & Any Accompanying Documents

What type of business structure are you going to use? The main options are sole proprietorship, partnership, LLC or corporation. All of those don’t apply to every business, a business with multiple owners can’t qualify as a sole proprietorship for example. There are also important liability and tax implications to the type of business structure you select. Sole proprietorships and general partnerships usually leave the owners open to personal liability for the company acts and obligations; that’s a less than ideal situation for most business owners. LLC’s provide some flexibility in terms of how you will be taxed, corporations not so much. 

If you’re going to go the more formal route with an LLC or corporation, what are the documents you need to file to get it started? What are the costs associated with keeping the business in good standing, or the legal requirements for doing so? How are you going to ensure that you aren’t opening yourself up to personal liability? These are the questions that can be answered and addressed early on, and provide some significant protection as your company grows and moves through the business cycle. 

Depending on your entity selection and the number of owners, you will likely need to put some governing documents in place - an operating agreement for LLC’s, bylaws for a corporation and partnership agreements for partnerships. This is an important step for a couple of reasons. One, it helps limit your personal liability by doing the formalities to show that not only have you formed a separate entity, you’ve taken the necessary steps to formalize the setup and govern your business as separate from the individual owners. Secondly, if you have more than one owner you’re going to need to document the relationship, the responsibilities, what happens when one owner wants out, and other information. It’s never going to be easier to put these documents in place than when you are starting out, especially any agreements between partners. 

Vet Your Business Name

A surprisingly large number of business names are already taken, and picking your company name is an important step. Do some research before you settle on one so you can avoid issues with trademark infringement, getting a domain name and confusion with an existing business. Search on Google, the USPTO site for existing marks and your state's existing registered businesses to see what’s already out there. The best thing to do is try and create something completely new and distinctive. 

Get Your Contracts In Order

Most businesses have clients or customers, it’s how they are able to stay in business. You will also probably use some outside vendors or service providers to help your company run and succeed. You should have contacts in place with all these third parties, it will help protect you, limit potential issues and can expedite any dispute process if one does come up. 

You can create a standard form of contracts for dealing with clients or customers, plugging the necessary specific information in each time. Contracts and clauses can be one-sided or lean towards being mutual, providing both parties some degree of protection. You’ll want to balance that carefully, protecting yourself as much as possible, but not going overboard to the point where you will be spending a lot of time redlining and redrafting agreements in order to get a client or customer to agree to the terms. Don’t make them too long, it will discourage people from signing and slow down your sales process; consider making them easy to read in terms of font and layout. Don’t make too many promises about what you will deliver or what your product will due, and look for ways to limit your liability. 

This is also a good way to address potential disputes upfront and set out a process for dealing with them. You could even require an informal process to first address any problems, and if that doesn't work you could move into mediation or arbitration, avoiding having to jump directly into a full on lawsuit and court case. 

Keep Proper Documentation For The Company and Workers 

Depending on your business entity setup you may have certain requirements for record keeping to remain in good standing and continue to limit personal liability. There may be a requirement to have regular meetings and record minutes from those meetings, or to carefully document certain company decisions and how they were voted on. Any of these formalities will be important to protecting the business and the owners so make sure to get a handle on what they may be and a process for managing them. 

You’ll also want to make sure that you have documentation in place for any workers the company is using. Mainly, that means employees and independent contractors. With employees, make sure you are properly handling the process of finding, hiring, managing and terminating them. There are numerous issues that come up with employees, from inappropriate interview questions leading to lawsuits, to employees who should be considered at-will accidentally ending up working on a quasi contract that prevents them from being terminated at the company’s discretion. 

Independent contractors create a lot of misclassification issues. Many businesses, in particular small businesses, want to use independent contractors as opposed to employees. The problem is that you can’t just call someone an independent contractor and that be the end of it; they have to meet certain criteria or you’re facing fines, penalties and lawsuits. Understand how to properly classify a worker as an independent contractor and get the necessary contract in place. 

Understand Your Intellectual Property & How To Protect It

Every business has some intellectual property, and it can be a very valuable asset. Patents, trademarks, copyrights and trade secrets are where your intellectual property falls. You’ll want to be able to recognize intellectual property when you create it so you can take the necessary steps to protect it. Some, like patents, trademarks and copyrights, may require registration to get the full protection your business needs. 

Trade secrets are an often overlooked asset of business, especially small businesses. This is your internal information that you don't want getting out publicly - how you market, your client list, your potential target list, your business plans, and anything else that isn’t generally known to the public about your business and how it operates. You’ll want some sort of confidentiality agreement in place with anyone who can access this information. 

Have questions about risks and liabilities your business might not recognize? Contact us for a free consultation. 












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