10 Common Legal Mistakes Startup Owners Make


You just started your new business and you’re looking forward to success. Before you start earning a serious amount of cash, you’ll need to take care of some legal issues. Experience of venture capitalists and lawyers showed that new startup owners make a lot of mistakes when it comes to legal obligations. It is crucial to get well educated about laws in your area of business and stick to them. Keep on reading so you can learn about 10 common legal mistakes young entrepreneurs make when starting businesses.

10 Legal Mistakes You Can Avoid

10 Common Legal Mistakes Startup Owners Make
Source: freepik.com

Not getting a straight deal with co-founders

This oversight may lead into the abyss, so make sure to remember what happened at Facebook when that company was a startup. Make sure to create founder agreement, which will be a get out of jail card for all involved.

Decide upon company division through percentages. Share the roles and responsibilities. Set the price of the company so you’ll know how to sell it if one of the founders leaves.

In addition, you should share roles each partner will have in the company. Make a list of all investments and stick to the overall goal and vision for the future.

Not setting the company as a corporation or LLC

Before doing anything else, founders should sit down and decide which legal form is the best for conducting business. This is very important since it will determine tax amount and different liabilities.

Approach this matter very seriously and it would be great to include an experienced attorney, which can guide you toward the best choice for your company. You can choose between following business forms: Sole proprietorship, general partnerships, C corporations, LLCs and limited partnerships.

Not having a standard form contract

One of the best practices your startup should include is making of a standard form contract which will protect you while dealing with customers and clients. Of course, there isn’t a standard form of contract. You’ll need to make your own which will be presented to every client you’re doing business with. Make sure to get lawyer’s help on this, so the contract won’t be too long, with grammatical and other errors.

In addition, it is very important to include limitations of your liability if the product doesn’t meet someone’s expectations.

Not complying with securities laws

Plenty of companies went under because they missed documenting all stock sales in the past. Don’t be one of them and ask your lawyer to work this through.

When you sell stock, you’ll need to do some disclosure, filing, and other form requirements. If you miss taking care of this, you may be fined drastically, and maybe forced to repurchase all sold shares even if your startup is near bankruptcy.

Not having employment documentation

Avoid fines, and even imprisonment and make sure your startup has all needed employment documentation. All of your employees should sign the documents, and below is a list of most crucial ones:

  • Stock option documents
  • At-will employment offer letters
  • Confidential information and inventions assignment agreement
  • Employee handbook
  • Benefits forms

Make sure you protect your employees from work-related injuries by creating worker compensation system, as experts from Withstand Lawyers strongly recommend. By making good plan, your employees will remain safe, and you’ll avoid a bunch of financial penalties.

Not protecting intellectual property

You probably started a business because you can offer something that others can’t. If this is the case, give your best to protect anything that’s proprietary about your product or service. Think about patenting, copyrighting and trademarking your business.

In addition, you should be working on confidentiality agreements, and confidentiality and assignment agreement for employees.

Not paying attention to tax issues

Don’t forget to tackle the most important tax issues once you launched your startup. First of all, you should choose your legal entity, which is described above. Second, you should think about sales and payroll tax.

In addition, create a system for stock option issues, and talk with the accountant about available tax incentives. Those will vary on the nature of your company.

Naming a company with trademarked name

Before making the name of a company official, make sure to search the registry of trademarks and avoid naming your company with one of those.

Go online and start searching for available names. You should check patent and trademark office as well. In addition, check for domain availability and buy the one as soon as you find it. Try not to pick a limiting name which may be changed once your company expands or transform.

Not having Terms of use agreement and Privacy policy

Your website must have both documents so you can protect yourself from users. The first document should include a description of the proper use of the website, disclaimers, warranties, limits on liabilities. There should also be the way of resolving disputes and intellectual property rights.

In Privacy Policy, you should explain which user data will be collected, shared or sold to third parties. You should also mention the use of cookies, how the site deals with users younger than 13, and what will you do to protect your visitor’s private information.

Not having a good attorney

Since most companies don’t have enough money at the beginning, they will go and hire an inexperienced lawyer to take care of legal issues. This can be a big mistake, and cost you a lot in the long run. Feel free and talk to numerous professionals and legal firms, which can take care of the following:

  • Corporation, commercial, and securities law
  • Contract law
  • Employment law
  • Intelectual property laws
  • Real estate laws
  • Tax laws
  • Franchise laws

Be aware that you’ll probably need more than one person on these tasks, so prepare your budget for that expense.

Yes, having a team of lawyers will be expensive, but taking care of delicate legal issues will strengthen your startup and you won’t find yourself in a sticky position. If your legal stuff is not in order, you may be fined, and you could actually lose the business over those penalties. Because of that, talk with other co-founders and find an affordable but high-quality solution.

Author: Cate Palmer