12 Common Legal Mistakes Made By Startups

two business owners

Every startup faces significant business and legal challenges, whether it’s dealing with employees or business formation. Startups often encounter the same issues and commit the same mistakes. Growing companies need to remain vigilant to possible liabilities and ensure that they take the right steps toward growth and innovation. Our New Jersey business law attorneys have put together twelve of the most common legal mistakes we’ve seen new businesses make.

#1: Failing to Make a Clear Deal with Co-Founders

We’ve seen this issue arise over and over again from startup companies. Failing to make a clear deal with co-founders is a mistake that can haunt you and your business in the future. This was a major legal issue Mark Zuckerberg faced with Facebook’s co-founder, Eduardo Saverin. If you’re starting your company with co-founders, you should agree early on about the details of your business relationship. Business partners should create a written founder agreement that addresses the following:

  • What their salaries are
  • How the equity will be split among founders,
  • Each founder’s percentage ownership in the company,
  • What their roles and responsibilities are
  • Whether remaining founders have the right to buy back a departing founder’s shares
  • The time commitment each founder is expecting to give to the business
  • How key decisions and day-to-day decisions of the business will be made

#2: Choosing the Wrong Business Formation for Your Company

Startup businesses often choose a business formation without consulting with an experienced business law attorney. The type of business formation you choose for your company will significantly affect the amount of taxes and liabilities it may incur. By simply selecting the right structure for your business, you can avoid major issues down the line. The types of business forms available to startup businesses include:

  • Sole Proprietorship
  • General Partnership
  • C Corporation
  • S Corporation
  • LLCs
  • Limited Partnerships

#3: Not Having The Right Legal Counsel

One of the biggest mistakes a startup business can make is trying to save on expenses by failing to hire an attorney or hire an inexperienced lawyer. Having an experienced lawyer on your side can help you avoid many legal problems that can result in hefty litigation costs in the future. An experienced attorney can help you with corporate and commercial laws, contract laws, intellectual property laws, tax laws, real estate laws, and more. If you need legal guidance with your startup, contact our New Jersey business law attorneys today at (201) 897-4942.

#4: Not Preventing Intellectual Property Issues

Whether you’ve developed a unique product, technology, or service, you need to ensure that you protect your business’ intellectual property. It’s important to obtain patents, copyrights, trademarks, service marks, trade secrets, or more. Startups often fail to take the right steps toward protecting what makes their business unique. But with the help of an experienced business law attorney, you can ensure that your business’ intellectual property is safe.

#5: Choosing a Business Name with Trademark Issues

It is vital to research your desired company name to avoid trademark infringement or domain name issues. Failing to choose the right business name early on can potentially hurt your business reputation. Doing your due diligence can help you avoid significant legal issues.

#6: Failing to Understand Business Tax Considerations

Another area that businesses need to address to avoid legal issues is understanding potential tax issues. Without proper planning, founders can find themselves with unanticipated tax liabilities. Startups need to obtain a tax ID, understand tax incentives, and stock options.

#7: Failing to Develop a Good Contract

Businesses need to have a standard form of contracts for dealing with customers or other businesses. It’s important to have an experienced business law attorney to overlook your contract to ensure that it’s suitable for your company’s specific needs and interests. Failing to do so can result in unwanted legal issues.

#8: Not Creating a Valid Employment Agreement

If your startup business is growing rapidly and you’re starting to hire new employees, you need to establish an employment agreement. You should draft an offer letter that carefully describes the employment agreement details, such as their job title, role, and responsibilities. It should also include any other relevant information about their role and whether the position is “at will,” meaning that either party is free to terminate anytime without penalty.

#9: Not Requiring Employees to Sign a Confidentiality and Invention Assignment Agreement

Since employees have access to confidential company information, it is important for startups employees to sign a confidentiality agreement--especially if you’re a technology company. This can help you protect innovative ideas created in house, ensuring that an employee won’t disclose confidential information to competitors or the public.

#10: Not Having Good Terms of Use Agreement or Privacy Policy for Your Website

A Terms of Use Agreement sets forth the terms and conditions for people using your website. Your Privacy Policy is a legal statement on your website that sets forth what you will do with the personal data it collects from users. It’s vital that you have a good Terms of Use Agreement that covers how the site can be used and limits on uses, disclaimers on warranties, and more.

#11: Not Obtaining the Permits, Licenses, or Registrations Your Business Needs

You might need permits, licenses, or registrations, depending on the nature of your business. For example, you might need city business permits, zoning permits, seller permits, sales tax licenses, and more. You may even need permits if you have commercial real estate.

#12: Not Complying With Securities Laws

If you form a corporation, limited partnership, or LLC, the sale of stock will be subject to federal and state securities laws. Security laws often require businesses to comply with certain disclosures, filing, and form requirements unless otherwise specified. Failing to comply with securities law requirements can result in extensive financial penalties.

If you need legal guidance with your startup business, M. Ross & Associates, LLC is here to help you. Contact us today at (201) 897-4942!