There are a host of legal factors affecting startups and entrepreneurs, from choosing the appropriate business structure, to compliance with state and federal laws, to creating well-drafted agreements governing the business’ operations. Ultimately, it takes a skilled business law attorney to help you avoid the pitfalls of starting a business.
Common Mistakes Startups Make and How to Avoid Them
Regardless of the type of product or service you are bringing to the market, it is crucial to protect your personal and business assets from liability as well as to identify and allocate the rights, responsibilities, and liabilities of the owners and partners. Some of the common mistakes startups make are as follows:
Choosing the Wrong Business Entity
There are various business structures to choose from, such as an S-corporation, C-corporation, or Limited Liability Company (LLC), each of which has different implications for legal liability, governance, taxation, financing, and operations. In short, it is crucial to choose a business structure that will mitigate the risks to your personal assets (e.g., house, bank accounts, investments) in the event your company incurs liability from its operations. Establishing a corporation or LLC creates a separate legal entity to conduct business while assuming its own legal and tax liabilities that with certain exceptions, mitigates the personal liability associated with owning a business.
Not Having Written Agreements
Entrepreneurs need to support and protect their business ideas and activities by putting in place agreements that set forth the rights and responsibilities of the owners, partners, and depending on the business, suppliers, distributors, and customers. These agreements include shareholder and stockholder agreements (in the case of a corporation), operating or company agreements (for LLCs), and service, supply or distribution agreements (for business and customer relationships). The type and scope of business activity will drive the type of agreement needed. In some instances, termination provisions will be critical; in other instances, it may be the delivery of components or compliance parameters that are most critical to the principal agreement. By working with an experienced attorney at the beginning of operations, you can implement best practices for your company that will provide structure and risk management for your transactions as well as sound corporate governance.
Not Having an Attorney
Seeking legal counsel may seem too expensive when you’re just starting out, but hiring an attorney is an investment that will pay dividends well into the future. An experienced business attorney can advise you on selecting the appropriate business entity, prepare the necessary foundational documents and agreements, implement appropriate corporate governance practices and compliance programs, in addition to protecting your personal assets from legal liabilities.