Anyone who starts a business is exposing himself or herself to legal and financial risks. As a new entrepreneur you may see risk as an unavoidable factor, but there are many risks you can protect yourself from. There is no magic formula to protect oneself from legal risks as some maybe very obvious and tangible, while others are hidden. However, an adherence to a few simple guidelines can go a long way insuring you cut losses right from the start. Here are some key points to help a startup assess their assets and legally protect them.
Registering your company for limited liability
Like many new entrepreneurs, you may find the process of deciding on the right structure for your new business confusing and daunting, but choosing the right business entity for your company can prevent you from exposing yourself to substantial risk of unlimited liability. Unlimited liability means that, in case the business is unable to repay a debt, the money can be recovered from the personal possession of the proprietor.
A sole proprietor is completely unprotected as his liability is unlimited. This means that if the business is unable to repay its debts, the creditor can have your personal assets sold off to recover the amount. This can happen because a sole proprietorship is not a separate legal entity from its owner. On the other hand, the director of a one person company, private limited company or limited liability partnership is fully protected in such a situation. As the entity is legally distinct from its director, his/her personal assets are always protected. Therefore, if your business hasn’t much money to risk, a sole proprietorship might do; if the opposite is at all true, go for a one person company, private limited company or LLP. The liability of the directors and partners, in these setups, is limited only to the extent of his/her contribution to the entity. Unless fraud has been detected, the personal assets of the partner are protected from any liability.
Intellectual property law and Non-disclosure agreement:
Your innovative ideas and intellectual property are your intangible assets, and though they maybe difficult to quantify, they still need protection. Great ideas are only of value if you can legally claim them as your own. Filing for the right type of protection whether it is a patent, trademark or copyright can not only clearly define your brand but heighten the chances for funding as well.
A non-disclosure agreement (NDA) is a legal contract stating that certain information and the extent to which its disclosure is restricted to third parties. Businesses that work on third-party projects require their employees to sign restrictions on the use and disclosure of confidential information. It's a good way to assure clients that their data is safe in your hands. An NDA is one of the most common ways to protect your trade secrets and other confidential information. Consultants and agencies, as they work with multiple organizations from the same industry, are usually asked to sign one to protect trade secrets.
Carefully planning and monitoring business practices can help avoid financial risk and protect assets in the event of a lawsuit. As an entrepreneur you can avoid potential conflicts of interest by ensuring you have a founder’s agreement.
A Founders’ Agreement, being a binding agreement, also puts to rest any confusion over the actions of any promoter. For example, it will address crucial matters, such as what will happen in case founder member leaves in under a year. It requires the co-founders to come to an agreement over crucial aspects of the business, such as their rights, responsibilities, goals, their broad vision for the company, vesting provisions and anything else that co-founders may want to settle before the business takes shape. Most new business owners will be required to guarantee significant contracts, which ensure the validity of major agreements between those involved, such as the founders, investors, and those who can lose money if the company fails. Such an agreement not only clears doubt among the founders but it also provides and road map for all those involved and working towards a common goal.
As a startup, asset protection planning is best done at the outset, when you have greater flexibility and options to grow in the direction you choose. As an entrepreneur it is your responsibility to asses risk and take conscious steps to protect your assets before there are any signs of financial problems. Operating with a sense of prevention and anticipation can ultimately steer your business onto the path of long-term success.