An idea for a start up company is a very exciting prospect. Lawyers who have experience with startup companies have some common tips that they always share with start up companies. Many new businesses make mistakes that can turn out to be very costly later on. We have attempted to canvas most of the important legal issues to consider when you are looking at creating a startup business.
1. Uncertainty in the relationships of the founders
Even the mighty Facebook start up story was not free from uncertainty over the rewards and responsibilities that were associated with the startup when it was in its infancy. Some of the most essential items to deal with are the shareholding of the company and whether this is dependent on continued participation in the business and if the other partners can buy the other out from the business and if so at what price. It should be clear what salary each founder can expect and what tasks and responsibilities they will be expected to carry out. Perhaps one of the most crucial elements is how disputes about the day to day running of the business are to be resolved between the founders. Also, the agreement will want to recognise what assets or original investment has been made or is expected from each of the founders. A term describing the conditions under which the business will be sold and who can make this decision is also essential.
2. Failing to Incorporate
Not incorporating can expose the founders to higher rates of tax and personal liability for the mistakes of the business, its employees or its other shareholders and directors. It is possible to start businesses as a sole proprietorship, a general partnership, a C Corporation, an S Corporation or an LLC which stands for limited liability corporations. Basically, a C Corporation is one that is formed under the state law of one state of the United States in the case of venture capital start up, this will usually be in the state of Delaware because of its generous incorporation conditions. An S Corporation is very similar to a C Corporation because it is under state law but it has less than 100 shareholders and usually attracts a tax benefit as it is a small business. Limited Liability Corporations are a hybrid of a partnership and a company, also formed under state law. Limited partnerships are a type of business organisation that is particularly suitable for holdings of real property.
3. Not having a clear standard contract
For the protection of the business, having a standard contract which is used to create a relationship with the customer is essential because it defines the product or service that the business will be providing to its customers and provides a level of legal protection if things don’t turn out the way that everyone was hoping. Some of the things that people often put in standard contracts are limitations on liability, a disclaimer, standard industry terms, pricing and terms of payment and a dispute resolution clause.
4. Lack of knowledge of employment issues
Although at a start up level, employment law might seem like an unimportant detail, the failure to create the necessary documentation for the employment relationships that are created can be a serious hurdle to the encouragement of growth for the business. Usually the business will try to make clear that there are a number of expectations of employees that include confidentiality, following a handbook, immigration laws, withholding tax certificate, benefits admin.
5. Intellectual property protection
Often startups have created a unique product, technology, or service, and they are naive as to how quickly their idea will be stolen if it is not legally protected. Depending on the type of value proposition that your company has developed, you will need to look at protecting your intellectual property through patents, copyright, trademark, service mark or the concept of trade secrets.
6. Tax issues
The tax system in America is one of the most complex in the world. When you are starting a business you are going to have to consider the type of legal entity your business is, issues like payroll tax, state sales tax, stock option issues, business stock or whether any tax incentives are available. Consulting a competent accountant on these issues can obviously be invaluable.