In the early days of a start-up, everything is fresh and exciting. Your primary concern is perfecting your product or service and getting your name out there. Far too often, start-ups place all of their focus on the business aspects and fail to consider the legal aspects of launching and running a business.
Start-ups often make these four legal mistakes, which can create costly problems in the future.
1. Not Choosing the Right Entity Type
Many start-ups simply want to get the business formation portion of the launch process over and done with as quickly as possible. Having ambition is great, but failing to consider each entity type and how it will impact all aspects of your business may cause problems in the future.
Sole proprietors, for example, can’t have partners and are at risk for personal liability.
There are several types of business entities, including:
- Sole proprietorships
- S corporations
- C corporations
- Limited partnerships
Rather than rushing through the process, consider consulting with a business lawyer to help determine which entity type would be best for your partners and business model.
2. Failing to Create a Clear Founder Agreement
Before you even consider launching, it’s important to have a clear founder agreement in place to avoid future conflicts.
This written agreement should include, among other things, the following:
- Responsibilities and roles of the founders
- Each founder’s percentage of ownership, and terms of percentage ownership
- Time commitments expected of each owner
- Buy back options for if founders leave
- Cash and/or asset contributions made by each founder
- The goal or vision of the business
- Terms of sale should the business fail
These are just a few of the many points that need to be covered when creating a founder agreement. Again, it pays consult with a lawyer when drafting your agreement to cover all of your bases.
3. Not Drafting a Standard Form Contract
While contracts will often be tailored to a company’s or client’s needs or terms, it’s still important to begin with a solid standard form contract.
Gather sample contracts from others in the industry and work with a lawyer to draft a contract that favors your company.
The goal should be to limit liability and have a clear procedure to follow should a dispute arise. The contract should also clearly spell out the pricing, when payments are due, and any interests or penalties incurred if payment is not made on time.
4. Avoiding Names with Trademark Problems and Other Issues
The name of your start-up is your brand, your company’s identity. Many start-ups fail to run a thorough check on their company’s name to identify potential trademark problems and other issues. Later on down the road, many of these start-ups find themselves facing lawsuits and a host of other issues that prevent them from progressing with their business.
In some cases, businesses are forced to shut down, which erases all of the hard work and effort put into the start-up.
Name conflicts can also prevent you from being able to purchase an appropriate domain name for your company’s website.
A lawyer can help run a thorough check on your behalf, but you can also search:
- Google for other companies that may have similar names
- The S. Patent and Trademark Office
- Domain name services to see if your company name is already taken
By avoiding these legal mistakes, you put your start-up in a better position to enjoy a smooth launch and fruitful future.