Startup Legal Advice:
7 Legal Mistakes Your Startup Must Avoid
When you are just starting you business, there are several "legal" things that you need to research so you do not set yourself up for failure. Many small businesses run into issues because they do not take a look at common legal mistakes. Knowing the right path to take and how to avoid common legal mistakes is imperative. This article addresses everything from how to form the correct legal business structure (LLC vs. C-Corp), how to draft employee agreements, what to know about taxes and the IRS, how to pick the right legal name, what a terms of service/policy agreement should include, and how to pick legal counsel for your startup.
#1 Choose The Right Business Structure: LLC or Inc?
Consult with an attorney first
Many people think that because a similar company or a friend chose an LLC or a small corporation (C-Corporation) as the right business form for their particular business, that they should do the same. To put it bluntly, this is wrong. There are several options to choose from when deciding on a business form and before you do anything, you need to consult with an attorney about it. Making the wrong decision could lead to higher taxes as well as other liabilities that you may not be prepared to take on. Do yourself a favor and explore your options with an attorney first.
Overall: you should consider a C-Corporation if you ever plan on going public. A C-Corporation allows you to issue shares without the hassle of providing K-1 (IRS) partner income statements.
#2 Draft Excellent Employment Agreements
Create a core group of employment documents
Before you even start your business, even if you are not bringing on other employees initially, you should have a core group of employment documents created. Many small business and startups run into legal problems later on when they do not have the correct employee documentation. This is where you can begin to protect your company from other liabilities. The majority of your employees, if not every one of them, should be signing these documents before beginning employment.
Overall: More employees = more problems. Keep a lean and agile staff with specific roles for each person. You should also create equity agreements early that discuss "what happens" when an employee leaves the company - these events are inevitable.
#3 Understand Key Tax Issues
Knowing what you are and are not responsible for
There are many taxes that businesses are responsible for and not knowing what they all are could get you into some trouble later on. Before beginning your business, you need to look at your business design and determine what you will need to financially prepare for. Many financial companies have a checklist for startups to assist you in the process. Some of these include sales tax, payroll taxes, and even some tax incentives. Knowing what you are responsible for allows you to prepare for these taxes and also allows you to not miss any on accident. For example, a startup attorney can help you better understand 409 A valuations and 83(b) IRS elections. These documents can be critical to forming the best startup company.
Overall: Always stay compliant with the IRS. Hire a CPA. Hire an attorney. And begin keeping as many records as possible - employee agreements, vesting documents, purchase agreements, balance sheets and profit/loss statements too.
#4 Choosing Your Business Name
Look for name trademarks, copyrights, and existing intellectual property (IP).
This is something that many startups overlook. It seems like a very simple task but when you are choosing your business name, there is much more to it than choosing something clever. You will need to do some research on the name(s) you choose to ensure that there are no trademark issues as well as domain issues for the website. This may seem like something small but it can turn into a major problem. You can run into legal troubles if you run into infringement issues that affect another business.
Overall: Keep a simple business name. The more syllables, the harder it will be for a customer or client to remember. It's also much harder to trademark a common expression or colloquial term.
Protecting your business
#6 Choose Strong Legal Counsel
Legally protecting your business
If you were to conduct a study, all of the top startup firms would have legal counsel behind them. Trust us, you do not want to be without it in the case of a legal issue. You need to consider getting legal council before anything happens. They are the best people to turn to with any of your startup legal questions as well as legal help for startups. They can also grow with you later on and assist you with any legal problems that come up. Having this relationship set up from the beginning will help you more because they will already know your business makeup and will be better prepared to help you later.
#7 Remember this...
Overall: Choosing a legal counselor or attorney is like getting married. You need to be smart and thoughtful about who you want to get in bed with. Remember: attorneys are expensive (and so are marriages). Interview the counsel, find out how much experience the attorney has, and make a decision that respects your startup as you grow bigger.