Congratulations! You’ve got a brilliant business idea, a passionate team, and the drive to make it big. As you navigate the exciting yet complex world of startups, legal considerations might not be at the top of your mind. However, a solid legal foundation is crucial for your venture’s success. Here at Shaumyan & Derbarseghian, LLP, we’ve seen many startups trip up on common legal hurdles. By avoiding these mistakes, you can protect your business and focus on achieving your goals. In this blog, we’ll discuss 5 legal mistakes every startup should avoid to prevent complications.
1. Skipping the Business Formation Step
Many new entrepreneurs choose to operate as sole proprietorships. This might seem convenient at first, but it exposes you to personal liability for any business debts or lawsuits. Instead, consider forming a Limited Liability Company (LLC) or a Corporation. These structures create a separate legal entity for your business, shielding your personal assets. The best choice for you will depend on factors like your industry, growth plans, and tax preferences. The U.S. Small Business Administration (SBA) offers a helpful guide on choosing a business structure.
Helpful Links:
Choosing the Right Business Structure: Three Factors to Consider by SBA
2. Failing to Secure Your Intellectual Property (IP)
Your ideas and creations are valuable assets. Intellectual property (IP) includes trademarks, copyrights, patents, and trade secrets. Take steps to protect your IP by:
- Trademarking your brand name and logo: This prevents others from using confusingly similar names.
- Copyrighting your original creative works: This protects things like software code, written content, and artistic designs.
- Considering patents: Patents provide exclusive rights to inventions for a limited time. The United States Patent and Trademark Office (USPTO) website offers a wealth of resources on IP protection.
3. Not Having a Co-Founder Agreement
If you’re launching your startup with partners, a co-founder agreement is essential. This document outlines ownership percentages, decision-making processes, responsibilities, and conflict resolution procedures. Having a clear understanding from the beginning can prevent major disagreements down the road. Here are some resources to help you draft a co-founder agreement:
- National Venture Capital Association (NVCA) Model Form of Venture Capital Agreement: Provides a starting point for co-founder agreements, though it may require legal customization.
4. Ignoring Employment Law
Even a small startup might have employees or contractors. Federal and state employment laws regulate minimum wage, overtime pay, discrimination, and other workplace issues. Failing to comply can result in hefty fines and penalties. Familiarize yourself with relevant employment laws and consider seeking legal guidance on drafting employee contracts and handbooks.
5. Neglecting Contracts
Building strong relationships with vendors, clients, and investors is crucial. However, verbal agreements can be easily misconstrued. Formal contracts clearly outline the terms of your business relationships, including payment schedules, service expectations, and dispute resolution mechanisms. Standard contract templates can be found online, but it’s wise to have a lawyer review them to ensure they comply with your specific needs.
6. Not Having a Compliance Plan
Depending on your industry, you might need to comply with specific regulations. For example, data privacy laws might require you to implement specific safeguards for customer information. Researching and developing a compliance plan can help you avoid legal trouble down the line.
7. Ignoring Legal Advice When You Need It
Running a startup is a fast-paced journey. Legal issues can arise unexpectedly, so don’t hesitate to seek professional legal counsel when needed. An experienced business lawyer can advise you on complex matters like venture capital funding, mergers and acquisitions, and potential legal disputes.
Ready to Build a Strong Legal Foundation for Your Startup?
At Shaumyan & Derbarseghian, LLP, we understand the unique challenges faced by startups. Our team of experienced business lawyers can help you navigate legal complexities, mitigate risks, and ensure your business thrives. Contact us today to schedule a consultation and get your startup on the right legal track.
