4 Legal Mistakes Often Made by Startups

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Starting a startup is an exciting moment in every entrepreneur’s life, but it includes a few obstacles along the way. From organizing business affairs and finalizing financial plans to finding office space and hiring competent staff – there are tons of things you have to handle before starting any actual work. However, that’s not all: some of the most serious problems include legal issues and avoiding troubles that could cost a lot and jeopardize your startup. Here are the most common legal mistakes and how to avoid them.

Pick the Proper Legal Entity

This is the first step in setting up your startup, so it’s quite important to do it correctly. The wrong legal entity will present your business to potential clients and partners in the wrong way and cause major legal problems in the years to come. So, consult a professional who can help you decide which legal entity is right for your business.

Legal entities depend on the type of company you’re running, as well as the relationship you want to build with your partners and investments. Although the classification varies from country to country, keep in mind that the most popular business structures for startups are partnerships, corporations, sole proprietorships and LLCs. All of these have pros and cons, so choose the right one if you want to stay out of financial troubles in the future.

Handle Your Co-founders

Have you seen what happened to Mark Zuckerberg in The Social Network? Unless you want your life to turn into a Hollywood movie, avoid arguments with your co-founders. Many startups are usually founded by a group of friends having the same dream and wanting to make it big in the business world, but what should you do when they become your business partners and co-founders of your startup?

The most important thing is to have mutual respect and understanding, while a written agreement never hurts. You have to specify the roles and responsibilities, both yours and theirs, as well as agree on the ownership percentage. Furthermore, define your salaries and find an exit strategy if something goes wrong. Going into business with your friends has its advantages, but only if you approach it carefully will you avoid legal problems.

Treat Your Employees Fairly

Just because your startup is small at the moment doesn’t mean it won’t grow, so you can’t always depend solely on yourself. Hiring reliable people to handle your affairs sounds hard at first, but it’s much better than doing everything alone. Once you employ them, treat your employees fairly and take care of their documentation according to the laws.

All your employees have to sign a number of documents before they start working, including the “at-will” employment offer letter, the confidential information and inventions assignment agreement, the IRS W-4 form, as well as several benefit forms. These and other documents will protect their rights as well as yours and are vital in all cases, from promotions to termination of employment. They are especially important should an accident or workplace injury occur, claims a trustworthy work injury lawyer. Finally, proper documentation will also save your company from being penalized by the external control.

Protect Your Intellectual Property

If you invent, produce, develop or manage a unique product or service, you have to protect it. The issues of intellectual property misappropriation are often and can become a burning issue for your startup any day now. There are several protective measures to look into – copyrights, patents, confidentiality agreements, trademarks, etc. – and they depend on the type of product or service you’ve developed.

When in doubt which method of protection to choose, remember that patents are the safest choice you can make. By patenting your product, you become the sole right holder, preventing any third-parties from stealing your idea. Patenting something isn’t easy, and only absolutely unique concepts are eligible for patents and trademarks, so hire good legal representation when entering this process.

Other Issues

Some of the other legal issues a startup could face include missing tax payments, finding a distinctive company name and not hiring an in-house lawyer. However, now that you know all of these potential threats, you can avoid them and take your startup to the top!

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About the Author

Marcus is an Australian IT support professional. He’s running his own business, working with companies that outsource their IT maintenance. He often writes about technology, business and marketing and is a regular contributor on several sites.