A solid legal foundation is a must for every startup. Else, an entrepreneurial journey full of fines, penalties, compliance issues and lawsuits awaits the founder.
- Choosing the correct business entity based on thorough research is crucial to formulating a good founder’s agreement and protecting intellectual property.
- A well-planned and drafted founder’s agreement ensures to tackle any uncertainties and hassles.
- Failure to comply with company and security laws could lead to severe financial penalties for both the founder and the startup.
- Choosing the right legal counsel is as important as choosing the right co-founder.
- Solid legal foundation is essential for the success of any startup, no matter what the idea or stage.
A startup means an endless list of challenges to deal, day in and day out. The launch of a product begins with humongous amounts of effort. There need to be resources put in place. A vital aspect in this regard is the management of a series of statutory requirements to save budding startups from being bogged down by unwanted legal problems and compliance issues.
Failing to adhere to the legal requirements may result in some bitter experiences where the law is concerned. If founders are not careful about their compliance issues, it may even lead to unnecessary lawsuits. That is why a solid legal foundation is a must for every startup. Unattended legal issues can even restrict a startup from raising funds.
Here are 7 most common compliance mistakes (& tips to avoid them) by startups that often put founders into legal soup:
Sole proprietorship, partnership, registered public/ private company are a few structures to choose from based on the nature of business. It is vital for entrepreneurs to select the correct business entity to ensure legal viability.
Detailed research on the pros and cons and also understanding the suitability of each of these options is essential to make the final decision. Tax treatment, liabilities, growth plans, and expenses are a few factors to consider before deciding.
Detailed research on the pros and cons and the suitability of each of business entity formation options is essential to ensure legal viability.
Change is constant and more so in the startup environment. On a startup journey from genesis to possibly unicorn status and six-fold growth, numerous factors come in the founder’s way and contribute to unpredictable changes in the set up.
That is why a well-planned and drafted founder’s agreement ensures to tackle any uncertainties and hassles. Intellectual property rights, remuneration, exit clause, equity breakdown, decision-making authority, and other operational responsibilities are a part of the founder’s agreement.
A founder cannot be blind to aspects like intellectual property rights, exit clauses, equity breakdown and decision-making authority when signing startup agreements.
Technology is at the crux of every business today, and more so if its a startup. Infringement is an expected possibility in the digital world. That is why it is essential to protect the product, domain name, and company name with strong legal bindings.
Patenting your invention and a securing intellectual property are a few steps that enable a startup to protect its innovation against its competitors in the market. Consequently, hiring an experienced attorney helps young, breakthrough startups defend themselves from any harm and ensure legal adherence at every step.
Early-stage startup funding for most founders usually takes place through family and friends. Nevertheless, if you do make it big, angel investors and venture capitalists are bound to enter the frame. However, stock issues, filings, and other disclosures require complying with security laws.
Watch: Startup founders share their biggest mistakes
As a founder, you just can’t leave it to your legal team. Failure to ensure that your startup is complying with company and security laws could lead to severe financial penalties for both the founder and the company. Following the rules and regulations while issuing stocks help curtail any future legal challenges.
A startup is liable to pay a variety of taxes. It can be overwhelming to manage all the taxations without help from a professional. Stock options, tax incentives, choice of entity, nature of business, and a few other factors are responsible for tax calculations.
Hiring a professional tax consultant to deal with all the fines, penalties, and additional tax-related regulations would be beneficial. Nevertheless, a founder still cannot let inertia prevail. You need to be updated with the latest changes to the laws and where your compliances might be lapsing or falling short.
Hiring the wrong Legal Professional.
Early-stage startup founders manage with a low budget. Founders are also constantly looking to be leaner in operations to curtail expenses. However, hiring an inexperienced legal counsel may lead to mistakes in the drafts of the legal documents. Furthermore, lack of experience or understanding of the legal challenges, and DIY projects by the founder may all lead to unnecessary legal trouble.
Hiring an inexperienced legal counsel may lead to mistakes in the drafts of the legal documents, leading to unnecessary legal trouble.
The end product could be tax penalties and even shutting down of the business. This makes it imperative that a startup founder not be stingy when picking up the legal team. Therefore, the Chief Legal Officer or Legal Counsel should ideally be an experienced person with credentials of having cleared startups from unprecedented legal soup.
Licenses and Permits
It is easy to get caught in the web of cheaper DIY versions and inexperienced legal counsel when you are a startup looking to cut costs. However, non-compliance in obtaining any permits can result in severe penalties.
Watch: Startup Contract Mistakes, Explained
Hence, to prevent your business from a dire legal fate, use professional help to manage even the trivial legal formalities to obtain business permits, zoning, seller permits, tax ID, and any similar compliance. Growing startups need to avoid any legal mistakes. So, founders must steer clear of any challenges with the law, to ensure more focus on enhancing growth and reputation.
So, choosing the correct business entity based on thorough research, formulating a good founder’s agreement, protecting the intellectual property is crucial. So is adhering to the security laws, paying all the taxes, hiring an expert legal counsel, and ensuring investment on permits & licenses equally vital to a startup with big dreams. It also helps a startup avoid fines, penalties, and any legal issues in the future. A solid legal foundation is crucial for the success of any startup, no matter what the idea, issues or stage.