As a start-up is growing, there are a number of legal issues internally and externally related that can seriously set back a company if not properly addressed. It’s important to choose the right legal service. Legal service websites like Nolo Law exist to help provide resources to businesses; but is nolo.com reputable? That’s always the question whatever legal service it is. On top of it, that can add costs quickly. In the interim, there may be some issues that can be researched and addressed through other means. In this article, we cover ways to address how to legally protect your start-up.
Most Common Mistakes Made with a Start-Up
As they say, the best offense is a good defense. We’ve outlined mistakes below that if addressed early, can prevent big costs and headaches down the line for a company.
Determining Business Entity
This can be a dry topic, but one we consider one the first things any reputable business should consider. Determining what kind of business is being operated sets up how much and who holds liability down the line. This is essentially the “playing field” one sets up for their start-up and the game and abiding rules of the players. Start-ups often have the option of operating as the following:
- Sole proprietorships
- General partnerships
- C Corporations
- S Corporations
- Limited Partnerships
It’s important to consider that while these titles can be changed during the lifetime of a business, it’s a lengthy and often time costly process.
Obtaining the Proper Permit, Licensure, & Patents
Many factors in the United States add to the number of licenses and permits required by a business entity. Some include the type of industry, what is being sold, and usually where the business is operating determines the kind of licensing required. This is not an exhaustive list but includes:
- Permits specific to industry depending on type of business
- Qualifications by the state, city, or county to operate within it
- Permits for use of home as base of operations
- Sales tax licensing
- Permits allowing sale & quality of health conditions (for restaurants, for example)
For industries and businesses that operate more on profiting off ideas or inventions, having proper copyrights, trademarks, and patents may be more of the focus.
Not Formalizing Agreements and Relationships Between Owners & Employees
Many businesses open without conducting formalized agreements between internal parties. As a result, it opens the entity up to all sorts of issues that can be brought up once conflict arises.
This is not only an issue between employer or founder against employees, but between founders. Standard contract agreements, such as nondisclosure agreements (“NDA’s”), contractor agreements (if you mainly contract out your work, versus hire employees) are some of the basics that lay out grounds for what agreement individuals are entering into when they are hired to build up your start-up.
Between multiple founders, laying the terms of agreement and stakes for those involved is fundamental. Being clear on equity, assets, salary, and conversely, the responsibilities, liability, and commitment held by a key member of a start-up, can make or break a company’s trajectory.
Not Having a Specific Enough Contract
A specific contract for your start-up is the key to legal protection for your company. The longest standing companies have legal counsel solely dedicated to protecting their assets and minimizing liability. As a start-up, we do not have that luxury.
While that should be something to keep in mind, most companies should have standard form contracts for ideally, any and all situations. Luckily, this has been automated and most disputes have a standard of procedure that are almost now forms for start-ups to complete. Starting with a base contract and building it to suit a start-up’s needs is one way to legally protect it from problems in the future.
Some issues to consider when creating contracts include:
- Starting with a sample contract to avoid unnecessary work
- Keeping in mind standard typeface and font size for professional look. While easy to dismiss, can be a distraction
- Outline basic terms of agreement concisely and clearly
- Limit warranties, representations, and spelling out limitations explicitly so as to lower liability
- Include clauses that address how to handle escalation, and how to handle arbitration
- Accounting for unforeseen problems; nobody can predict the future, and it should not be on your company to hold that liability
Most of this can be covered in sample contracts and are standards across different companies. However, it never hurts to also have a business lawyer look over your draft when completed as well.
It is a herculean effort to begin a business, and it is arguably even harder to keep it running and in the black. Once start-ups begin building a following, making back their overheads, it can start feeling like everything is secured and in its place. It may not seem like it, but due diligence early on can prevent all sorts of issues down the line.