Starting a new business is stressful and mistakes are inevitable. The key is making certain any missteps don’t have serious long-term ramifications, such as blunders in regards to the niceties of law.
The legal mistakes made by entrepreneurs generally fall into 3 categories.
Legal mistake #1: Lack of a founder agreement
You started the business with 2 other people and there’s plenty of mutual respect and trust. You know that 1 of you is going to handle sales and marketing, another will be product development and the other is accounting. You know you’re going to split the profits 3 ways. In the stress of getting the business up and running, you never bother to formalize all of this.
Big mistake.
What if 1 of the partners wants out?
It might be a year from now, or it might be 5 years from now. You need an agreed-upon structure for their exit and how their shares are divided.
What is the time commitment expected from each partner?
This is particularly relevant when 1 or more of the partners might be keeping another salaried job until the new business is stabilized.
How are decisions going to be made?
In the example we outlined, a simple majority vote will suffice. But what if there’s an even number of partners? What if the partners have different shares in the business? What if your accounting partner only owns 20 percent of the business, but the decision in question is a big one that falls under their purview?
Spell it out beforehand.
Though we hope it doesn’t come to this, what if 1 of the partners clearly doesn’t carry their weight? You need a process by which a partner can be relieved of their shares without costly litigation.
Legal mistake #2: No established structure
Do you plan to incorporate in order to shield yourself from any liability problems?
If yes, the matter of which type of corporation comes up. You can be a Limited Liability Corporation (LLC), an S Corporation or a C Corporation—to say nothing of alternate structures like a sole proprietorship.
They all have different tax implications; they all work differently for how you get paid and for how profits are treated. If you don’t get this right at the outset, it becomes more expensive to do so later on.
Legal mistake #3: Lacking good counsel
There’s a wide range of other legal mistakes entrepreneurs make, but they can all fall under the heading of lacking a good business attorney to advise them.
- Are you properly valuing and protecting your intellectual property?
- Do you have good form contracts for dealing with vendors—detailed enough to protect your interests, but not so long that a vendor runs from doing business with you?
- Is something as basic as your company name protected under trademark law—and have you infringed on anyone else’s trademark with your chosen name?
- Do you, any partners and any potential employees have no-compete agreements with a previous employer in the same industry?
These are just a handful of the questions that entrepreneurs face at a time when their business is most vulnerable to a legal challenge.
We know that cost savings is important, but don’t make the mistake of treating the Google search engine as your free legal counsel. The law degree and industry experience of a qualified lawyer outweighs a Google search every time.
