5 Common Legal Mistakes That Can Trip-Up Your Startup
A Note From The Editor
Think your company has what it takes to make our Top Company Cultures list? Apply now.Apply now »
Your entrepreneurial dreams can quickly become nightmares if you fail to acknowledge the legal realities that can make or break your new business.
No matter what that business is, it will involve the law. You can choose to look at legal issues as a burdensome cost of doing business or you can look at the law as a tool to be leveraged to further your goals and position yourself and your company for success.
No matter how you look at it, however, you can spare yourself unnecessary grief by avoiding these five common legal mistakes for start-ups and entrepreneurs:
1. Lack of structure.
Especially for solo entrepreneurs whose company begins and ends with them, forming a corporate entity may seem like an unnecessary complication. The reality is that by establishing a corporate structure, whether an S-corp, a limited liability company, a general or limited partnership, or any number of specialized entities, you can protect your personal assets from any liabilities you incur in your business, minimize your tax liabilities, and take advantage of other benefits afforded by the law.
2. Stepping on someone’s IP toes.
You have a world-changing idea, a name for your business that will stick in customers’ minds like glue, and an eye-catching logo. Before you invest your blood, sweat, tears, and dollars on any of those, you need to make sure that you are not infringing on someone else’s intellectual property. You or your intellectual property lawyer should conduct thorough searches and other due diligence to ensure that your company’s business and branding don’t expose you to infringement claims or force you to make costly and disruptive changes down the road.
3. Undefined roles and responsibilities
You and your partners all have the same dreams of success for your new business, but while everybody may be on the same team, failing to clearly define the roles each of you has in the business – who owns what, who does what, and who controls what -- is a recipe for conflict and confusion. You and your co-owners need to have a written partnership or shareholder agreement that makes clear the respective rights and obligations of each owner.
4. No exit strategy
Just like you may not be thinking about divorce on your wedding day, how you or your partners would go about leaving your business behind may be the furthest thing from your mind as you start your new venture. But business partners can grow apart or have different visions and goals as the years go by and may ultimately want to say goodbye or cash in their chips. Knowing how and when owners can sell their stake in the business, how much they should be paid for their shares, and who can buy an interest in the company is crucial. Have your attorney prepare a buy-sell agreement that addresses these back-end issues up front to provide for smooth transitions in the future.
5. Legal DIY
As an entrepreneur, you’re one of those folks who takes things into their own hands; if there’s something that needs to be done for your new business, you’ll take care of it. Combine that can-do attitude with the seeming ease and affordably of do-it-yourself legal websites and forms and it can be tempting to see your laptop as your lawyer. But saving a few dollars upfront by not working with an experienced small business attorney can cost you significantly more in the long run.
Filling in some blanks on preprinted forms that don’t address your specific needs, goals, and issues can leave you exposed to a number of problems that an attorney could have helped you avoid. With so much to do and so many other things to worry about as you try to get things off the ground, get someone on your team who can bring you peace of mind and ensure that you are positioned for success.