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Avoid These Top 10 Legal Mistakes That Startups Make

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Establishing a business requires a lot of effort. Indeed there are several things that you need to do before you can open the door to your business. For instance, you need to create a product or service that you will offer to your customers, establish your target market, and hire a set of employees, among others. 

 You can combine some steps or even modify or cancel them as the business progresses. However, there are those steps that you must get them right from the beginning.  One of the areas that you need to be careful about touches on the legal aspect.

It would be best if you established a solid legal foundation when forming the business to avoid hefty penalties and jail term for non-compliance.  

Legal Factors Affecting Startups and Entrepreneurs

The following are the legal environment of businesses.

Organizational laws

Businesses are subjected to state law that directs their conduct and operation. Different business entities have separate legal status and challenges. For instance, the legal requirements and issues of a limited liability company are different from partnerships or sole proprietors.

Contract Laws

The law will affect your business when it enters into an agreement with another entity or person. It also includes government procurement laws.

Employee Protection Laws

These are laws that are established to protect the employees’ working conditions. These laws cover hiring, contracting, pension, dismissal, and redundancy. Your company must keep its employees safe and to treat them fairly and with respect. Further workers are entitled to minimum wage, statutory holiday, and pension enrolment, among others. 

Consumer Protection Laws

Your startup should not act unfairly to its customers because they are protected under the consumers’ protection laws. These laws comprise of Trade Description Act that prohibits giving of misleading information about the products. Sales of Goods Act which forbids the sale of defective products or the weight and measures act that ensure that goods are weighted using standard weighing equipment.

Health and Safety Laws

You are required to provide staff with a safe working environment. The environment should be free from continual loud noise, or hazardous materials. The workplace should be free from discrimination, bullying, or sexual harassment.

10 Common Legal Mistakes Made By Startups

1.    Not Remitting Tax Regularly

Whether your business is a company or otherwise, you need to pay taxes as required by the law.

2.    Failure to Protect your Intellectual Property (IP)

The IP is a valuable asset that includes patents, trademarks, and copyrights. It would help if you protected them; otherwise, other entrepreneurs will claim a right to them. 

3.    Not Keeping Track Of Expenses

Not tracking your startup expenses throughout the financial year is a mistake. Don’t look for receipts only when filing your tax returns.

4.    Wrong Legal Entity

You can register either a public or private limited company, partnership, and proprietorship. However, you need to know their difference in advance.

5.    Mixing Business and Personal Expenses

At times your expenses and company’s expenditures may become indistinguishable. Have a business account and separate the records from the onset to minimize confusion.

6.    Lack of Founder’s Agreement

Sign a founder’s agreement that clearly states how you will deal with failures, ownership, roles, and responsibility, and so on.

7.    Non-Compliance with Securities Laws

Entrepreneurs that sell their stock to investors in exchange for funding will be required to have proper documentation. However, the failure to formalize such agreements can contribute to legal troubles.

8.    Lack of Proper Licences

Every business should have the necessary licenses and permits to function without breaching the regulations. Any form of non-compliance can attract hefty monetary penalties.

9.    The Use of Generic Content on Your Company Website Privacy Policy

Have a website to promote your products and conduct business. However, using generic content on your privacy policy attracts legal consequences.

10. Failure to Have Employee Contracts or Agreements

Your startup should have adequate employment documentation that formalizes permanent and temporary staff. The agreement should define their duties, compensation, and benefits.

How Does Government Punish Startups And Entrepreneurs?

When businesses are caught misbehaving, the government punishes them through fines. For instance, Facebook was hit with a $5 billion fine, while the Federal Trade Commission fined YouTube owned by Google $170 million for breaching laws.

More so, the founders and executive can be jailed if caught breaking the corporate laws. Kareem Serageldin was jailed for 30 months for approving the concealment of losses for the securities portfolio backed by Credit Suisse’s mortgage. Besides the jail term, a person may suffer financial damages and lose their jobs for their misdeeds.

These punishments are meant to hold the corporations accountable for their actions and decisions. On the other hand, putting executives behind bars doesn’t happen often, so the main option that government agency use is hefty fines that stomp out the structural and cultural issues that caused the breach.

For that reason, it’s crucial to implement a close monitoring mechanism and put accountability mechanisms in place before a problem arises. Some monetary penalties are big enough to change the way your startup does business or affect its bottom line.

A bad reputation may affect your customers, investors, suppliers, creditors, and employees, among others. For those reasons, non-compliance can have an impact on the survival of your business. For that reason, don’t approve practices within your business that breaks the law.

Conclusion

If you’re an entrepreneur that is establishing a company, you should conduct thorough research on all laws touching on this new business venture. To avoid non-compliance, the company can engage in professional legal service. Taking this step will prevent your startup from incurring any legal risks.

The government agency may punish you and your company through hefty fines that can contribute to the closure of the business. They may also jail the executives, and the non-compliance reports taint your company’s reputation. In view of that, you should study all the legal aspects that affect businesses in your state or country. Then plan to comply.

The next article will consider the reality check for startups.

I'm a passionate and full-time blogger. I love writing about startups, how they can access key resources, avoid legal mistakes, respond to questions from angel investors as well as the reality check for startups. Continue reading my articles for more insight.