If you’re reading this, there’s a good chance that you’ve started your own business, or that you’re getting ready to do so. Congratulations! As you’ve probably discovered by now, there are a lot of moving pieces in setting up a new company, many of which are completely foreign to you.
One of these items — legal matters — almost always falls toward the bottom of the list for new entrepreneurs. But neglecting the basics can have devastating consequences down the line. Let’s look at a few areas that startups often overlook or mishandle and how you can avoid falling into the same small-business mistakes.
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1. Choosing the Wrong Business Structure
Forming a corporate entity is usually one of the first steps that new businesses take. It’s important to have some type of structure in place to limit your personal liability and to help keep business income and expenses separate from your own.
There are several business structures available to you, but the most common are the corporation and the limited liability company (LLC). Each of these has advantages and drawbacks. The entity that makes the most sense for your business will depend on the ownership structure, potential tax implications, and how you want to grow the business.
Choosing the wrong structure is usually fixable, although you could lose money in taxes or other fees before you’re able to make it right. And there are certain issues that are harder to untangle. For example, there are certain residency requirements for shareholders of an “S corporation.”
Finally, most states have periodic filings required to keep an entity active.
Failure to file, or a late filing, can lead to late fees or even forfeiture of your business.
For all these reasons, it’s imperative to work with both an attorney and an accountant to set up your business and make sure you understand what you need to do to keep it in good standing.
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3. Not Having Team Members Sign Contracts
As your business begins to grow, you’ll have independent contractors and, potentially, employees working on projects. These relationships often begin informally enough. However, failing to have team members sign at least basic agreements can lead to big headaches down the line.
At the very least, team members should sign nondisclosure agreements and invention assignment agreements. These documents ensure that your team won’t use your ideas for their own purposes (or bring them to a competitor) and that you’ll have full ownership of any work product that they produce for you. Your employees and consultants have almost no incentive to agree to these terms after the fact, so it’s imperative to have them sign clear, comprehensive documents when they begin working for you.
Employees create more work for you than contractors, since you’ll need to worry about taxes, insurance, payroll, and any number of other issues. And don’t think that you can avoid all of this simply by calling a worker a “contractor.” Federal, state, and local laws and regulations set out a variety of factors that determine whether a worker is an employee or not, and the penalties for misclassification can be steep.
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4. Not Protecting Your Intellectual Property
Nearly every business has at least some intellectual property that it needs to protect. For many businesses, this IP forms the backbone of their product.
For instance, where would Uber be without its mobile app and the infrastructure undergirding it?
If your product is based on proprietary software or other IP, it may make sense to investigate patenting or copyrighting your technology. Even if your business doesn’t involve proprietary technology, it’s almost always a good idea to trademark your brand name, both to prevent others from operating under names that could be confusingly similar and to ensure that you aren’t inadvertently infringing on another company’s trademark.
Many businesses put off protecting their intellectual property, often because they think it’s too expensive or not a priority. This might be true for certain patents, but trademarks and copyrights are inexpensive. Besides, they're a lot cheaper than having to change your name or pursue an infringement action down the line.
Other Small-Business Mistakes to Avoid
The above is by no means an exhaustive list of legal issues faced by new companies. Indeed, the law can often seem like a monster from a nightmare. You cut off one head, and two grow back in its place!
Legal matters can be overwhelming, which is why it’s important to find an attorney who you are comfortable with, and who is well versed in helping companies like yours. You would also do well to find an accountant and bookkeeper who can help with the tax and finance side of things, and depending on your business model, other professionals may be needed as well.
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The good news is that once you find a team of advisers that you like, they should be able to help take legal and financial issues off your plate so that you can get back to doing what you love — and even make a little money along the way!