Top 5 Legal Mistakes Startups Make and How to Avoid Them
Introduction
Any way you look at it, starting a business is tough. You have to have a clear goal in mind, a plan on how to get there, an idea of who will make up your customer base, a business model layout, and not to mention an enormous amount of money saved up! Add the whole mess of legal regulations associated with starting a business on top of it, and it can seem downright impossible. That’s why it’s important to have a basic knowledge of business law before you begin! Here are five common legal mistakes new business owners make, and how to avoid them.
Business Structure
One of the biggest mistakes you can make when starting a business is choosing an improper business structure. “The type of business structure you decide on for your startup impacts your funding opportunities, tax responsibilities and personal liability” (OpenLegal). While it is possible to change your business structure down the line, it will help you achieve a far stronger foundation if you choose the best structure for your business right off the bat. The four main business structures are as follows:
Sole trader: A single person owns and runs the business, and is solely responsible for the business’s losses. This is a high risk/ high reward business model.
Partnership: Two or more people own and run the business, and they share the income as well as the losses. The risk/ reward lessens for each individual involved.
Company: A legal entity run by directors and owned by shareholders. The company owns the business’s money, and is therefore responsible for both its gains and losses. While a company has an easier time raising capital and shields the owners from personal liability, the startup costs involved are often significantly higher than with other business models.
Trust: A legal entity run by a trustee for the benefit of its beneficiaries.
The type of startup you want will impact your business model; for instance, if you want to start something like a photography business or a bakery, a sole trader or partnership model will likely suit you best. However, if you want to start something more along the lines of a law firm or a restaurant chain, a company might be in your best interest. Finally, if you want to start a charitable organization, a trust model will almost certainly be the way to go! Consider your options carefully, and weigh the pros and cons of each before choosing the model you want to use for your startup.
Intellectual Property
The backbone of a business is the ideas behind it! Unfortunately, many new business owners are unaware of the importance behind trademarking, copyrighting, patenting, etc. If you don’t claim legal ownership of your brand, logo, and ideas, they remain in the public domain, and you have no legal right to them. Some of the things you’ll need to establish copyright over include website code, app code, custom software, images, logo, brand design, company name, and product design. Laws surrounding copyright can be technical and tricky, so it’s best to consult a legal professional for it.
Third Party Contracts
It’s easy to get caught up in the excitement of starting a new business! That being said, it’s important to make sure all contracts with third parties– customers, suppliers, and anyone else providing your business with goods and services– are set in writing. Oral agreements simply aren’t enough when it comes to business deals! You can cover yourself best in customer dealings by writing up a clear, concise Terms and Conditions document, which will serve as the baseline for what people can expect when they enter into business with you.
Employee Contracts
This is a continuation of the previous section. It’s extremely important that your employees know what to expect when they come under your employment– even if they’re your friends or family, you need to serve them an employment contract! This covers both you and your new employees, and establishes clearly the expectation you both have. Furthermore, ensure that your employees’ confidentiality and IP are protected, and see what benefits you can offer them!
Taxes
While every new business owner is vaguely aware that taxes are something they will have to worry about, many fail to realize just how convoluted and complex the process truly is. Furthermore, businesses are taxed differently than individuals, and many struggle with calculating franchise taxes, sales taxes, or correct payroll taxes. Unexpected tax liabilities, penalties, or fines can spell the end for a startup, so it’s important to have a firm grasp on this or to find help from someone who does. Be sure to also consider the tax implications of stocks, expenses, and deductible income.
Conclusion
Starting a business is no small undertaking, but it’s also a huge and exciting step in life! Even if you are the sole proprietor of your business, remember that it’s a huge project, and it is simply not realistic to go it alone! Don’t be afraid to ask for help every now and again. This is surely the most important advice of all! If you are careful and thorough in your preparation, you will surely have a better chance of success. Now, to all our entrepreneurs out there, get going, and good luck!
Sources
OpenLegal. “Top 6 Legal Issues for Startups - OpenLegal.” Open Legal, 16 Aug. 2020, https://openlegal.com.au/top-6-legal-issues-for-startups/. Accessed 1 Aug. 2023.
Rajwans, Jindra. “Resources.” Rajwans - Business Lawyers, https://rajwans.com/resources/top-5-legal-issues-many-startups-face-can-a-holding-company-structure-benefit-your-business. Accessed 1 Aug. 2023.
Patel, Rudri Bhatt. “Top 8 Legal Mistakes Made by Startups.” Legalzoom.Com, https://www.legalzoom.com/articles/top-8-legal-mistakes-made-by-startups#4-failing-to-understand-tax-considerations. Accessed 2 Aug. 2023.
