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Critical Legal Mistakes Made by Startups

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critical legal mistakes

The main obstacles that startups have to deal with can range from your basic financing to the marketing of your business once it gets off the ground. As unprofitable as any mistake in each of these areas can be, none can be as costly as legal ones.

The extent of legal matters that can kill a thriving business is really vast. It goes without saying that you have to avoid all the issues we are going to describe below. Startups are obviously not free from legal obligations and just an idea to make your business public can result in taking legal actions.

It’s important to note, you can make many legal mistakes and they can also vary in severity as well as the ways in which they are dealt with. Speaking of the legal mistakes, knowing what they are and how to avoid or solve them is invaluable. Without any further delay, let’s look at some of these common mistakes, their paired solutions and prevention methods.


  1. Forgetting to Put Anything in Writing
  2. Ignoring Labor Laws
  3. Keeping Away from Tax Laws
  4. Not Officially Setting the Business Up as a Corporation
  5. Intellectual Property Protection
  6. Not Seeking or Hiring Legal Counsel

Final Thoughts


1. Forgetting to Put Anything in Writing

This is probably the most cardinal and in some ways, the most obvious thing to do. But it    often gets forgotten. Founding a business means that certain specifics have to be written down for the sake of functionality.

As it pertains to the founder or founders, the following list is some of the things that can be put into writing:

  • Responsibilities of each founder or party
  • The handling of major decisions
  • The procedures following a departure
  • Dividends or salary of founders

The best way you can achieve this is by drawing up legally binding contracts. Different but similar contracts can also be drawn up in order to deal with outside parties. These include contractors and suppliers.

Such contracts are perfect because they can be tracked and verified. This is in stark contrast with verbal agreements that generally don’t hold up in court.

This idea of putting everything in writing applies to the outlining of all company policies and procedures. For this reason, it is important to have an employee handbook design that is comprehensive and ultimately in compliance with labor laws. ​​Having an employee handbook will help you create a comprehensive step-by-step list. It can show all processes or tax notes with flowcharts. You can visualize the inner workings of your startup with data widgets and interactive solutions. Nowadays, you can use advanced tools and visualizations features to quickly cope with writing assignments.

2. Ignoring Labor Laws

An interesting segway indeed. Labor laws are an important thing to think about when creating a startup that hires employees, few or numerous. The labor laws should point out certain responsibilities that are specific to one’s job. Other things that labor laws outline include the job title and pay rate.

It is possible to be penalized if employees are wrongfully classified in any way. An example of this is grouping people working overtime as salaried workers. This is a practice that can result in said employees not being paid.

These penalties are serious and can stretch back years, depending on how far back the offenses go. Penalties can also be accrued if job candidates are given responsibilities they are not trained for. An example of this is meeting unnecessary quotas.

Avoiding this requires customers to have clear laws that state the responsibilities of each position and to have employees commit to them alone. This would in turn follow the law.  Conversely, it is crucial that non-disclosure agreements are signed by employees.


3. Keeping Away from Tax Laws

When it comes to taxes, every startup has to be careful not to leave anything to chance. Whether it be intentional or not, if payroll taxes are not collected and handed over to the government, you may be held liable. You can face many challenges but try to get acquitted with the tax laws and find advanced tools that can help you cope with the tax tasks on a daily basis.

The last thing you want to do is to try to avoid paying taxes. The taxes may seem unbearable but pale in comparison to the penalty of neglecting the duty. This is usually done by trying to classify someone as a contractor as opposed to an employee. The company or individual may avoid certain payroll responsibilities that should be taken into account.

4. Not Officially Setting the Business Up as a Corporation

The biggest mistake a business owner can make is forming a partnership with other groups because it exposes them to several risks. If any legal action is taken against this partnership, all members are considered liable and can lose a lot of their personal belongings.

The best way to avoid this is by going the route of forming a corporation. The corporation itself is an entity with separate members. As such, even bankruptcy won’t hit members because they are protected from damages.

Different kinds of corporations bring alternate things to the table. S-corporations for example, act as tax-through entities, passing profits without them being double-axed. Despite this, the best corporation to build for a small business would be a C-corporation. This is because of the fact that it supports startups that are backed by venture capital.

5. Intellectual Property Protection

Whether you’re selling soft toys or digital dashboards, the protection of the intellectual property is of great importance because of the value it holds. If intellectual property is properly protected, the company is allowed to build upon it without fear of consequence.

Any innovation allows the business to compete against other companies producing similar products or offering the same products. However, if the internet protocol, for example, is not properly protected, the likelihood of it being stolen or copied grows exponentially.

As a safety net, it is always a good idea to invest into an Emergency Recovery Script to tackle potential threats for your website. This will help protect you from potential hacking and security breach.

Smaller businesses are the most at risk in these cases. Industry giants are ever-present and they seem to stay ahead or up to speed through dubious means such as this. The best way to protect against this issue is by hiring an attorney that is knowledgeable and trustworthy.

6. Not Seeking or Hiring Legal Counsel

Your typical startup does not have much capital and its founders can make the mistake of trusting close family members and friends to run affairs. This is usually a mistake because their inexperience and lack of understanding of legal issues lead to calamity. Hiring a legal professional is the only way to avoid this mistake and the costs are eventually worth it.

Pro tip: you can always hire a chatbot agency to help in making lesser mistakes white starting up a company

Final Thoughts

There are many things to take into consideration before starting a major business. But legal matters are the most important cases to focus on first. The legal matters are also the ones best positioned to cause you to ruin your startup. For this reason, they should be given a lot of attention and further study.

​Startup founders should also be patient with the legal authorities’ performance. Try to be friendly with legal counsels and support teams even despite terrible services. And remember you don’t need a law degree to avoid the mistakes. You just need to make sure you set your company up for success from day one!


Kossi Adzo is the editor and author of He is software engineer. Innovation, Businesses and companies are his passion. He filled several patents in IT & Communication technologies. He manages the technical operations at

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