There is no denying that starting a business is a challenging task, especially if you do it for the first time. After the creative process is done, every entrepreneur needs to assess the market, adjust the business concept to fit the market niche, hire the right staff and tackle legal issues that come together with establishing a company.
We looked at the most common issues that first-time entrepreneurs face when building their own company and we created a 7-step guide that will help you avoid these legal traps. Read on to find out what they are.
Choose the right type of legal vehicle
One of the very first things you will have to decide on is what type of legal entity your company is going to be registered as. There are multiple options to choose from and each and every one of them offers unique benefits to company owners, so whatever you decide, make sure that the legal structure corresponds with your vision of the company.
The most popular business form is Limited Liability Corporation (LLC) which is formed under state laws and offers a number of tax-advantageous benefits. Other popular legal forms are C Corporation and S Corporation. The former is taxed as an entity, without taxing the shareholders separately. The latter, though, avoids double-taxation, as the corporation does not pay income taxes, but it can lead to losing personal tax returns by shareholders.
There is also a Sole Proprietorship. When deciding on such a business form you will be required to present local and state permits. You will not need to provide as many filing and legal documentation as for establishing an LLC, but the undeniable drawback of a Sole Proprietorship is that there can be only one legal owner. This type of corporate structure is recommended for individuals with significant capital.
Be aware of Securities Laws
Every startup that sets out to raise funding capital, whether through crowdfunding, sale of stocks, or personal investments, needs to be aware of securities law structure. Most securities laws require that the company which offers shares for sale or other forms of investing complies with local and federal laws that include full disclosure, filing, and other formal requirements.
Securities landscape is very complex, therefore it is not the best idea to tackle the issue on your own, without specialized experience or thorough preparations. Failure to comply with securities laws can result in significant financial penalties that can break any newly established business.
Don't put off record-keeping
Between all tasks that need to be handled right away you should not forget about the importance of record-keeping from the very beginning. Coherent record-keeping, monitoring and budgeting systems are not just about balancing the money coming in and coming out.
An all-encompassing bookkeeping system will help you make better financial decisions for your business, increase your chances at financing your venture and, most importantly, be compliant with auditors. It is recommended to hire an experienced professional who could assist you with inspecting your current books and help you maintain them in the way that is the most advantageous for your company. An accountant can also offer valuable insight and useful tips for financial security, budgeting and tax optimization.
Apart from having record-keeping systems for accounting purposes, do establish doable routines for organizing other files and agreements, so that you can retrieve the relevant documents in no time.
Find your corporate lawyer at the beginning
Many entrepreneurs feel obliged to handle all issues by themselves, after all it is their company, so it is only logical that they will best protect their own interests. While it makes sense to take care of some of the things on your own, such as choosing the right support staff and deciding on the bookkeeping service, other things are best to be handed over to professionals, especially when it comes to legal aspects of the business. For example, filling in company incorporation documents incorrectly or incompletely may lead to very serious legal issues. Even trying to amend the documentation takes a lot of time, leaves you with tones of paperwork and can take toll on your professional relations.
Considering that, unless you have experience or appropriate education, do not attempt to DIY it. Instead, consider choosing the right legal counsel that will help you put all documents in place and assist you with advice whenever you need it. For many startups, money is often tight and you may feel that paying for legal service is not necessary at the moment, but it is an expense that can protect you from significant financial penalties, that's why you do not want to skip on it.
Copyrights, trademarks and patents matter
Patent is the optimal protection of a new product, ensuring the rights of the inventors and producers. Trademarks protect the value of the symbol you may use to identify your products or services. Finally, copyrights protect the authorship.
As soon as you register your company, you should start working on protecting your intellectual property, even if the final product or service has not been rolled out to the market yet. It is also recommended to require your staff to sign confidentiality agreements that legally bind the employees to keep company information confidential, both during and after the employment. Protecting intellectual property is in the best interest of your staff, the shareholders and the financial future of your venture.
Maintain necessary employment documentation
Employment contracts are an inseparable part of your corporate documentation. They are an important element for setting up the right business relations with your employees, establishing trust and a sense of security. Coherent employment documents show your compliance with local laws and can successfully protect you from possible liabilities.
From the legal perspective, it is worth to do annual review of employment records to make sure they remain in line with the industry standard. Do remember that whenever you decide to implement any changes to employment contracts, consult with your legal advisor to ensure that the new clauses do not affect your business in a negative way.
Write down the rules
If you are working with business partners and investors, it is important to define key roles and responsibilities in order to avoid confusion and possible conflicts. It may seem that everyone is on the same page when it comes to daily operations, but until you put everything in writing you will never come to full agreement. It is important to establish who takes care of day-to-day business decisions that affect the daily work of the employees and who participates in making key business decisions.
Although it may seem uncomfortable to talk with your shareholders about the money, it is a conversation that you need to have. Decide on salaries, investment contributions, percentage of shares and the process of possible sale of the company. It is also a good idea to talk about circumstances of removing the founder or board member.
All that combined gives you and your partners a level of protection. And from a more practical standpoint, everyone knows what they should and shouldn't do to make the company a huge success.
These 7 fail-proof tips are here to help you avoid common legal mistakes when setting up your first business. Keep them in mind to make the process of creating your own company as smooth as possible.