Starting any kind of business involves making important decisions that leaders will be held accountable for legally. Ideally, people make the best decisions for their company that will be legal and bring them the most profit, but when it comes to the unique business of running a startup, it can be easy to make legal mistakes, especially when people are not aware that their business decision can hurt them legally. Here are some of the most common legal mistakes startups make.
Not Documenting Business Matters Properly for Tax Purposes
When people are running a company, they have to file and pay taxes differently than they would if they simply worked for a company owned by someone else. Because startups often start very small, founders and CEOs may not realize they legally need to follow the same rules as any other company, which means that all employees have to read and sign the appropriate forms, including form I-9, form W-4, benefits forms, “At-Will” employment offer letters, the employee handbook, and any forms addressing stock options. These forms protect employees as well as the founders of the company from legal complications later, which is one reason why they are mandatory for tax purposes. Founders of the startup also needs to make sure to officially establish what kind of company the startup is (LLC, S corporation, or C corporation) and make sure they charge sales tax for any products or services sold as well as payroll tax for all employees. Founders of startups should also be aware of any tax incentives they may be eligible for, so they can save money on their taxes.
Not Being Informed about Intellectual Property Law
Founders of startups often unknowingly violate copyright law if they choose a name for their company or web domain that is already taken, use web content licensed to someone else, or use trademarks owned by others without permission. At the same time, once a startup decides on a name, they may run into problems if another company registers that name before the startup has a chance to claim it as their own. Patent protection should also be secured for any startup selling a unique product, so that other companies cannot legally sell that product. Those running a startup should educate themselves about copyright law right away, otherwise they may make business decisions that could result in serious legal repercussions that might prevent the startup from beginning to do business at all.
Not Solidifying Co-Founder Agreements Right Away
If more than one person founds and owns a startup, they will often neglect to sit down and officially plan the percentage of the company that each founder owns; each founder’s unique role and responsibilities; how to deal with issues like founders leaving, being dismissed or passing away; and how other important business decisions will be made amongst the co-founders. If no formal co-founder agreement is made and problems occur once the startup has started doing business, it is very easy for a founder to get upset and file a lawsuit if they feel they are not being treated fairly. This may lead to co-founders abruptly leaving the company, which puts the company at risk of losing its stability.
Not Hiring Good Lawyers
If someone has enough money to establish a startup, they should put aside enough money to hire a good lawyer or law firm to help them manage their startup and make sure they are making good legal choices and not forgetting the necessary steps towards managing their company. Many startup companies are tempted to hire friends and relatives as their lawyers to save money, without being concerned with their level of legal expertise. Having a lawyer or team who are experienced in corporate law, intellectual property law, and tax law is the best defense to protect a startup from making a legal mistake with expensive consequences.