Legal issues are often at the back of an entrepreneur's mind in the excitement of launching a startup. But just because you are small doesn't mean that people are going to let things slide when you infringe upon their trademark or don't tell the full truth to investors.
This guide is going to introduce you to the dumbest legal mistakes early startups make. And how to keep the personal injury lawyers away.
Not Having LLC Member Agreements
Apparently, 30% of businesses are more likely to succeed with more than one founder. But you need to know who owns what. What is everyone responsible for? What if a cofounder decides they want to leave?
You need processes for all these things. It's impossible to take someone to court when it was never defined what everyone's role in the company was from the beginning. Cofounder fights are notorious for getting nasty, so make sure you have a formal agreement from the start.
Choosing the Wrong Corporate Entity
There are many different types of companies you can set up. Some come with tax and legal advantages. They also come with restrictions. And this is a decision you have to make a careful judgment over. Be aware of what each company type demands from you.
Furthermore, be aware that if you wish to seek massive growth and venture capitalist investment, a Delaware C-Corp is the only option. Without this, most investors won't consider you.
Failing to Keep Proper Records
The phrase piercing the corporate veil is a term that states a founder of a company could become personally liable for a business's debts if they failed to keep their corporation separate from their personal affairs. The only way to actually prove that you've done this is to keep accurate records.
Every transaction should have a record, and those records should be backed up multiple times.
Using Someone Else's Name
One of the dumbest mistakes you can make is to use someone else's company name. Many entrepreneurs do this all the time because they don't put any effort into checking if that name is taken. The full extent of their mistake dawns on them when they receive the inevitable 'Cease and Desist' notice.
They then have no choice but to change their name and start from scratch all over again. Regardless of when this happens, it's going to cost you a lot of money.
The act of comingling accounts is something early startups are notorious for doing. If you are still setting up a business account, this may be inevitable, but do it for too long and your personal assets could become a target if you are forced to pay out for unpaid corporate debts later.
Plus, it's difficult to keep track of what transactions are coming from where. This is where admin gets tricky and it becomes impossible to see what's personal and what your business transactions are.
Not Protecting Intellectual Property
Your business is formed based on your ideas and product concepts. Without these, you are nothing. The startup world isn't always a fair world. Companies have stolen the ideas of startups before. And the truth is they can get away with it simply because there were never any protections in place.
Without intellectual property protections, anyone can steal your products and there's nothing you can do about it.
Failing to Take into Account Employees
It may be some time before you actually decide to take on employees. This is fine, but when it does happen you must have the right protections in place. For a start, you should have agreements with your employees regarding whether they can start side projects and whether they can reveal your ideas and trade secrets.
You also have to have firm agreements regarding hours and pay. Even the nicest employee could turn around and sue you later.
Whenever you sign one of these contracts, don't just place your name on it. The contract should also have your position and role within the company.
Think about State Laws
There are many Federal laws regarding the governance of companies. But there are also many state laws you may forget to take into account. You don't have to read the entire legal code regarding businesses, but some simple Internet research should bring up the main issues you have to take into account.
State laws include things like taxes, dismissing employees, hiring policies, and other such things. You can feel free to do this as and when issues crop up, but make sure you do it.
What are the biggest legal mistakes you believe a startup can make?