The decision to become an entrepreneur is not a decision to make lightly. Business ownership requires dedication, as founders work tirelessly to find their path to success. While the life of an entrepreneur can be rewarding, it’s not always easy and is often full of unforeseen circumstances and unique obstacles. Luckily, many problems are avoidable, and others can be easier to overcome, if your company’s essential legal matters are in order.
While working with startups all day, helping them navigate the legal jungle, I see these five (easily avoidable) legal mistakes most often:
1. They use documents they’ve found online
More and more often, up-and-coming entrepreneurs are turning to the Internet to find legal documents (and advice). There are even a few new websites developed over the last year or so that allow entrepreneurs to share their files with one another in an effort to help startups cut costs. The lure of using one of these “ready-made” legal documents may be temping, but beware, they could end up costing your business more in the long run. Legal documents need to be tailored to fit the unique needs of your startup; using one made for another business could leave you exposed to unnecessary risks and might land you in hot water later on. To avoid exposing your business to unnecessary risks, it’s imperative that you have an attorney review your documents prior to use.
2. They don’t have sound agreements
Business owners enter into many agreements, usually with clients, service providers, employees and contractors. Often enough, the details of these legal agreements are overlooked, and many entrepreneurs end up getting the short end of the stick. Always make sure you have a good understanding of the risks you are taking on when it comes to contracts you can make informed decisions and determine what is right for your business.
3. They don’t protect their intellectual property
Because the foundation for most startups is their intellectual property, it’s important to legally safeguard it by filing appropriate trademark, copyright or patent applications. In an instance of infringement, this ensures that you have recourse to protect your intellectual property. In addition, you should always make sure you are given ownership rights to everything a third party is creating on your behalf so you can use it as you see fit.
4. They don’t incorporate their business
It may seem easier and more cost effective to form a sole proprietorship, but incorporating your business will always better protect you from personal liability. As a sole proprietor, any legal liabilities or debts incurred by your business become your personal responsibility and it’s more challenging to secure loans. To avoid personal liability, try exploring a different option, like a Limited Liability Company. LLC’s require minimal record keeping and allows business owners to allocate profits and losses where necessary.
5. They don’t have a founder’s agreement
Many people begin their startup in hopes to escape some of the rigid formality of the corporate world. Those that make the jump with a close friend or former colleague often informally divide work responsibilities amongst themselves during their business’ early stages. While this might work during a startup’s infancy, as the business begins to grow, this informal division of roles becomes a liability. Companies with more than one owner need to have a founder’s agreement in place to avoid future disagreements about expectations and values. This document will outline the details of your partnership and serves as an internal operations guide by laying out each founder’s key responsibilities, explaining how to handle disputes and running through the company’s decision making process.
The road to success isn’t easy and there will be challenges along the way. Having a comprehensive document in place from the beginning, like a founder’s agreement, will help guide entrepreneurs through handling internal issues.