Starting a new business is always challenging. As a startup, you are likely already facing a million things at once, from raising capital to training staff to procuring clients. When you add legal challenges to the mix (which are practically inevitable for startups), it can seem downright overwhelming.
The good news is you’re not alone. Since startups tend to face many of the same legal challenges, this ground has likely already been covered by businesses that came before you. If you know what to expect, you’ll know how to prepare for these issues and possibly even avoid them. Let’s take a closer look at 5 legal issues startups commonly deal with and what to do about them.
Structuring Your Business Entity
When starting a business, one of the first decisions you’ll need to make is what type of entity to form (e.g., sole proprietorship/partnership, LLC, corporation). This decision will have a major impact on many aspects of your business, and each type of structure has pros and cons. Some factors to consider:
- Taxes. Different business structures are taxed differently. For example, C-Corporations are subject to double taxation (once at the corporate level and again at the shareholder level when profits are distributed as dividends). S-Corporations avoid this by passing income and losses through to shareholders, who report them on their personal tax returns.
- Liability. The structure of your company determines who is liable if things go sideways. Sole proprietorships and partnerships are simple to form, but you and your business partners will be personally liable for any debts or damages incurred by the business. If you form a limited liability company (LLC) or corporation, however, your personal assets will be protected in the event that your business is sued.
- Raising Capital. If you plan to raise money from investors, the structure of your business will play a big role. For example, it is usually a bit easier for a corporation to issue stock when raising capital than it is for an LLC.
Best solution: Consult with a startup attorney before setting up your business entity to weigh the pros and cons and decide which structure is most beneficial for your type of startup. Deciding these things now is much easier than trying to restructure later.
As a startup, you’ll be entering into all sorts of contractual agreements, from leases and vendor contracts to investor agreements, employment agreements and NDAs. These contracts are essential to the smooth operation of your business, but they can also be a minefield if you don’t know how to protect your company.
Best solution: Be proactive about all legal agreements. To avoid problems down the road, make sure you:
- Have a lawyer review all contracts before you sign them. This may seem like an unnecessary expense, but it’s worth it to have someone with experience flag any potential issues and make sure the contract is fair to your business.
- Don’t sign anything you don’t understand. If there’s something in the contract you don’t understand, ask for clarification before you sign.
- Get everything in writing. This may seem like a no-brainer, but it’s amazing how often important details are left out of verbal agreements–and those missing details are precisely where legal problems begin. Get all key points of the agreement down in writing to avoid any misunderstandings later on.
Taxes are a fact of life for businesses of all sizes, but they can be especially complex for startups. There are a lot of moving parts to keep track of–and if you’re not careful, it’s easy to fall behind on filing and tax payments. The last thing you want is an IRS audit or a massive unexpected tax bill.
Best solution: Stay on top of your taxes from the very beginning. Put systems in place to track expenses, receipts, estimated taxes, and other tax-related documents throughout the year. This will make it much easier to ensure that you’re paying what you owe. Make sure your accountant understands the tax laws for your state and your business type, and have an attorney review your tax structure to avoid unwelcome surprises.
Licensing, Permits, and Compliance Issues
Depending on the type of business you’re starting, you may need to obtain licenses and permits from local, state, or federal agencies. These can range from simple business licenses to more complex regulatory compliance approvals. Failing to obtain the proper licenses and permits can result in steep fines–or even force you to shut down your business.
Best solution: Do your research before you start your business to find out what licenses and permits you’ll need. Then, create a timeline for obtaining them so that you can be sure to stay in compliance. In some cases, it may make sense to hire a professional who specializes in license and permit acquisition.
Every business has some sort of intellectual property–something that can be legally protected via registered copyright, trademark, patent, etc. For your company, your IP could be a new product, software, trade secrets, or even just a unique name or logo.
For startups like yours, legal issues with IP often take one of two forms:
- Someone infringes on your IP (e.g., using a logo too similar to yours, stealing a secret recipe, etc.), doing damage to your business; or
- You inadvertently infringe on someone else’s IP and wind up getting sued over it.
Best solution: Take steps to register and protect your intellectual property so you don’t run the risk of someone else stealing it and profiting from your hard work. The best way to protect your intellectual property is to consult with a lawyer and file the appropriate trademarks, copyrights or patents. This will give you legal recourse if someone does infringe on your IP. Also, do your homework before building out logos and other identifiable material to make sure it’s not too similar to a competitor.
At Hood Venture Counsel, our firm concentrates our efforts on helping startups navigate common legal challenges like these. Let us work proactively to help you avoid problems before they start. Reach out to us to schedule a free initial consultation regarding the needs of your startup.