It is not a piece of cake to set up a startup. It needs quite a bit of effort and resources to create a successful business idea and commence its operation. Many tasks need determination and focus to launch a certain product in the market, safe and sound. As there are several to consider before making a reliable market product, the founders generally disregard the legal and official requirements of their startup during their initial stage. Due to this, the founders fail in creating a firm and legal foundation for their startup.
These legal mistakes can prove to be lethal to the company in many serious lawsuits. Due to the ignorance of founders meeting the legal standards can cease the startup from being financially aided to accelerate the business.
Some of the most legal mistakes committed by the startups are:
1. Choosing the Business Entity
Picking the perfect entity plays quite a deep role in creating your startup legally reliable while forming a new business. There are multiple structures are available to pick from sole proprietorship or partnership, a registered company, etc. The startup owners that rush directly into the registration process without researching much about the right option can regress the business development. Some of the most important rules that a rookie founder must establish while making a decision are liability, growth plans, tax treatment, and legal expenses.
2. Founders’ Agreement
Change is the only constant in this world. Startup founders tend to work in a constantly changing environment. Hence, it is necessary to develop a legitimate drafted founders’ agreement in circulation to avoid any issues or waste any time. A properly drafted founders’ agreement highlights the major roles of a co-founder that minimizes the probability of conflicts in the future. Some of the most important factors to look for in a founders’ agreement are decision-making authority, intellectual property rights, remuneration, exit clauses, operational responsibilities, and equity breakdown.
3. Protection of Intellectual Property
Something that is quite highly valuable for a startup is intellectual property. Infringement has become quite easier due to the large expansion of technological adoption. Whether it is the domain name, company name, or even the product, infringement has become way easier than it was before. Safeguarding their IP, startups can secure their ideas and stand in the big leagues against large players in the industry once they patent their invention. If a startup is unpatented, industrial giants can copy or plagiarize their invention to progress to the top in the market.
4. Non-compliance with Security Laws
One of the most commonly committed legal mistakes by the startup founders is their non-compliance with the security laws. Angel investors generally help startups in raising money. Friends or family can also do that without having any concerns about security laws. Disclosure is needed to comply with the applicable security laws. Serious consequences such as huge financial penalties for the startup founders can befall the company if the stocks are issued without complying with the law.
5. Not taking Tax Issues Under Consideration
To operate securely and safely, every business owner needs to pay different kinds of taxes. Without any kind of professional help, the founders might find themselves in accordance to pay specific fines and penalties. Factors such as tax consideration with the option of stock options, entity, tax incentives, etc. based on the nature of the business impact the company. Hence, startups must talk to the expert tax consultant to make sure that all the tax-related matters are complied with exuberantly and regulations are being obeyed.
6. Not hiring a Professional Legal Counsel
Founders make every effort to cut down the expenses as startups run on a low budget during their early stage. As a result, they choose inexperienced legal counsel or accept the opinions of their friends or family. Although, this can lead to even more legal issues as there have been cases of many inaccurately drafted documents and mistakes are made based on their lack of experience and understanding. Some founders believe to do everything by themselves and draft all the legal processes on their own. To avoid all of this, founders should hire professional as well as experienced legal counsel to tackle any penalties or risks of shutting down the business completely.
7. Lack of Licenses and Permits
Without gaining any legal licenses or permits, there isn’t any business that can move smoothly. There are different kinds of permits that are based on the nature of the business and contain industry-centric permits, sales tax, city, zoning, seller, state qualification, home-based business, county and federal or state tax ID permits. There are hefty fines needed to be paid if there is any kind of non-compliance in gaining licenses and permits. If the founder consults a professional legal consultant from an early stage, legal pitfalls can be avoided quickly.
8. Financing a Business
Another issue with newbies is how they finance a company. Although crowdfunding has been quite popular these days, what is better is that start-up enterprises should only get funded by accredited investors. Such accredited investors are those who at least have million dollars net worth excluding the value of their home or regular income. You might land in trouble by issuing stock and taking money from non-accredited financiers.
You should be careful about engaging unregistered brokers and dealers and allowing them to raise money as it is not legal and may lead to major complications for enterprises down the road. So be extra careful while raising investment capital to ensure you raise money from the person who works with accredited investors. You should either raise money on your own or only with an authorized broker-dealers.
Synopsis
Above-listed is the most common legal mistakes that most enterprises commit while starting up. It is, therefore, suggested not to overlook the legal compliances while starting your venture for its long-term and successful innings.