Establishing your business requires considerable work and acumen. It also requires that you avoid costly mistakes that can hurt your business. One of the areas where you ought to be careful is in legal matters affecting your business. You ought to know the common legal mistakes that can turn out lethal for your business, and understand how you can avoid making them. Let’s expound more on this.
Legal mistakes you should avoid in a startup
Choosing the wrong legal entity
One of the very first decisions that you must make is in what legal form to operate your business. Choosing the right legal entity for your business should be deeply informed by the type of business you wish to start. The reason being, different companies, are supported by various legal structures.
When you fail to choose the right legal form to operate your business, you are likely to attract many hurdles that will slow the growth of your business. You will be most likely to incur higher taxes, and also become subject to significant liabilities.
To avoid the legal mistake, you should choose the right legal entity that will suit you’re your startup from the following sampled options:
- Sole proprietorship: This will require you to have a business permit only. It is a single-ownership entity, which means you cannot bring in a partner. That also means it will be difficult accessing capital from investors, as most require that your business has some form of partnership. Besides, this form of legal entity has no protection against business creditors; hence you can be sued.
- General partnership: This is best suited if you have a co-founder. Each of you will be liable for the debts of the business. This, therefore, means your personal property is exposed to business creditors, and a lien can be imposed on you in case of loan default.
- C corporations: They are established under state laws. If your intention is to create a venture capital-backed company, this is the best structure to operate it from.
With the right kind of legal structure, you can be sure that you will avoid repercussions in the future.
Poor legal documentation
Many business owners fail to draw legal documents that suit them, and they end up having many liabilities to bear. Well, your business should use proper legal documents that protect you while dealing with customers, partners, and clients. That said, there are no single set of standard legal documentations that are universal for all businesses. You should, therefore, use the ones that are essential to your startup. As a rule of the thumb:
- Ensure that you have proper employment agreements to avoid disputes with employees
- Craft proper privacy policies in line with regulations like the GDPR
- Ensure you have terms and conditions that are clearly outlined in ways that target readers can understand
It’s always better to have a lawyer handle your legal documentation, rather than doing it on your own.
Circumventing tax laws
Tax issues can bring down your startup. For example, you might find yourself in a situation where you have unfiled tax returns or you omitted crucial information when filing. That is likely to put you into hot soup with the authorities coming onto your neck. You may be slapped with a hefty penalty or, worse, face legal action for tax evasion charges. If you are in such a situation, then you should find a qualified tax evasion lawyer to help defend you against the charges. But you should try not to fall into such a legal situation in the first place. It is crucial to know these tax issues:
- Your choice of the legal entity- different legal structures are taxed differently
- Sales tax: you will need to collect sales tax on the sales of your products.
- Payroll tax: find out if your city or county imposes payroll tax.
Avoiding tax issues will help you build a good relationship with your government and also financial lenders.
Lack of intellectual property protection
The logo, name, symbol, unique product, service, and technology are all part of intellectual property. To avoid infringement by third parties, which might lead to loss of your intellectual property, you should always protect them. You can do so by obtaining Copyright, patent, or even a trademark.
Starting and running a successful business requires that you know more than just business. It comes with many responsibilities, including legal matters you ought to keep an eye on. Legal mistakes can happen, but you should be careful to avoid them as they might destroy your business!