Venturing into a new startup looks like a dream come true for every passionate entrepreneur out there. But, getting the business up and running takes planning, precision, and patience.
Especially when it comes to dealing with legal checkpoints and startup laws, things get a bit trickier. Statistics reported that almost 18% of startups in the US crashed last year due to legal challenges.
With changing government policies, tax law, and corporate law structures, new entrepreneurs and startup businesses often make legal mistakes. That’s because there are numerous legal aspects that affect the startup company in the initial months. Here are 10 such common legal mistakes for startups that can ruin the business in the long run. Watch out.
Legal Issues for Startups
Entrepreneurship requires basic knowledge of the multiple aspects of startup laws to conduct the legal responsibilities involved in starting a business seamlessly. Starting from registering the company, involving third parties, structuring proprietorship, the legal considerations for startups are many.
Lawrina has all the essential legal aspects to consider at the inception of an effective startup company or entrepreneurial venture. Here is a list of multi-disciplinary aspects of startup laws and several legal issues involved in startups.
- Business structure: A fair idea about the business structure will help determine personal liability and funding resources. Business structure classifies into the following types.
- Sole proprietor: Single person owner of a startup holding all the exclusive rights.
- Partnership structure: When more than one person holds the company rights and distributes shares.
- Company module: A separate legal entity with business heads, shareholders, and employees. It can be a limited liability company (LLC) or a corporation.
- Startup registration
Startups in the US need registrations. The procedure involves filling out a startup application form with personal information about the owners and shareholders.
- Intellectual property
Intellectual property rights are exclusive rights of the owner of a startup who puts the idea of it. Intellectual properties include the following.
- Website domain name.
- Application and web codes.
- Brand name.
- Brand logo.
- Company illustrations.
- Custom software.
- Startup and product designing.
- Themes, fonts, colors.
Many startups need third parties as investors to resource the capital. These are the following types of financing options for startups.
- Bank and non-banking financing companies.
- Equity financers.
- Third-party investors.
- Venture capitalist.
- Trade license
Getting a trade license is the mark of authentication of the startup. The trade license processing has different corporate law systems implemented in different states. Trade license helps to lead ahead of the legal wars at the onset of the startup company.
- Tax responsibilities
Lots of legal battles involve in taking over the tax responsibilities of a startup. It needs the owner to apply for federal and state TAX ID or Employer Identification Number (EIN) to comply with the taxation norms. The US Small Business Administration has a thorough guide on tax responsibilities.
- Employee agreements
It’s crucial to get employment contracts ready that will help assure workplace transparency and employee’s confidentiality.
- Labor laws
Labor laws are essential startup laws where the owner needs to decide on the daily and annual labor wages, gratuity, PF, incentives, bonus, insurance, etc.
Startup owners can learn about the legal nuances and gather legal advice on startup laws from several entrepreneurship law projects that leading law institutions worldwide conduct. One such program is Small Business and Entrepreneurship Law Project, Stanford Law School.
X Common Legal Mistakes for Startups
1. Lack of A Transparent Written Deal With Business Partners
If the startup has other business partners, it is better to have legally transparent equity policies and shared percentages among partners. It helps with the goodwill and strong business relationship between partners while keeping off legal issues ahead.
2. Trademark and Copyright Infringement
Owners that lack enough research before picking the brand name or domain often end up facing trademark and copyright infringement issues. The United States Patent and Trademark Office is the right place to look for trademark regulations on startups.
3. Disparity in Tax Responsibilities
Without proper knowledge of tax regulations in both federal and state tax departments, owners can fall into the trap of unnecessary fines and penalties. Getting a valid federal and state tax ID puts a shield of social security to the startup company. A startup needs to bear sales tax, GST, payroll tax, and many more.
4. Choosing Sole Proprietorship Over LLC or Corporation
One of the significant legal mistakes for startups is to choose sole proprietorship over corporation or LLC structure. Thus, owners often end up liable to pay excess tax amounts, penalties, etc. LLC comes as a mix of corporate and limited partnerships. Hence, it falls under state law and provides limited liability safety.
5. Choosing the Wrong Legal Backing
Often enough, owners don’t hire legal counsel just to save investment. But several legal factors need professional legal advice, like security laws, license, employment regulations, federal policies, privacy, personal data security norms, corporate law, tax regulations, etc. All these need proper legal backing. Without that, owners end up in legal hooks.
6. Licenses and Registration Hazards
Startups can end up in legal traps for not having the proper licenses and registrations. Based on the startup type, there are sales tax licenses, industry-oriented registrations for regulated startups, state and federal qualification registrations, health permits, zoning licenses, etc.
7. A Scattered Employment Agreement Form
Lack of organized employee agreements and not having written employment contracts can lead to unwanted legal issues for startups. A well-formatted agreement form should mention job roles and responsibilities, salary and vacation details, etc. Thus, an employee has a fair idea about what he/she’s signing up for.
8. Not Putting Up Confidentiality Clauses While Hiring
Often startup owners avoid putting up confidentiality clauses in employment contracts. Thus, there are risks of facing confidential information or personal data leakage. It can turn dangerous for a company in the future.
9. Asking Unlawful Interview Questions
Federal structures put regulations on hiring employees. Thus, getting into unlawful queries like race, religion, gender, disabilities, etc., can potentially put the startup company in legal trouble.
10. Lack of Well-Formatted Business Contract
When approaching a good business lawyer can end the startup in legal battles. There are clauses that only law professionals can mention and understand. Making a business contract that is legally challenged is a flaw in itself.
These are the 10 common legal mistakes that startups often make without proper understanding. Thus, hiring a lawyer specializing in startup laws is the safest option.