One of the most important things you can do when launching a new business is to have your legal issues taken care of. This includes choosing the right business structure, setting up a legal budget and becoming familiar with employee laws. Here are a few legal tips to help you take care of the paperwork ahead of time and prevent costly conflicts and disputes down the line.
1. Form A Legal Business Structure
One of the first things you’ll want to do is set up a proper business structure and get incorporated. Setting up business as a sole proprietorship is generally not a good idea as your personal assets may get entangled in case of a lawsuit. Popular options include LLC, S Corporation and C Corporation. If you plan to seek funding, you’ll need to form a C Corporation.
You will also need to pick the place of formation of your business entity. According to attorney Loren Barr at Barr & Young Attorneys; “Delaware is a popular option with many business owners due to its flexible business laws and lack of state corporate income tax for companies who don’t actually conduct business in the state. Nevada also has appeal because it doesn’t tax corporate profits or shares”.
2. Set Up A Budget For Legal Expenses
Make sure to budget for legal expenses since these can add up pretty fast. Legal fees can include the cost of getting incorporated, obtaining a business license and attorney costs. Your legal expenses will be more substantial if you decide to raise capital.
You may also want to set up a trademark in order to protect your brand. This makes it easier to recover digital properties like domain names and social media accounts with your brand in case another party decides to register them.
If your startup has more than one co-founder you’ll need to document the co-founder relationship in detail in a legal document named Founder’s Agreements. This covers going over job duties and hourly commitments and what to do in case if one of the co-founders decides to sell or becomes disabled.
3. Get Familiar With Employee Laws
Become familiar with federal and state withholding taxes, OSHA, unemployment insurance and workers compensation regulations. It can be tempting to hire an employee as an independent contractor to save money but it can cause a legal issue if there is a misclassification. The IRS is targeting industries where misclassification is rampant including internet services, security, catering and landscaping. For example, if you require the worker to show up at a set time every day and work under a supervisor they are unlikely to be legally considered an independent contractor.
4. Clear Your Business With Your Previous Employer
Go over your employment contracts and non-disclosure agreements in order to find out if there are any clauses in place that will give your employer ownership rights to your new business. If you are employed and moonlighting on the side, you’ll want to contact your employer’s HR and legal department in order to make sure that you’re able to work on any side projects. It’s generally safer to start a new business in an unrelated field to that of your employers.
One the bright side, a few states including California, Delaware, Kansas, Minnesota, Washington and North Carolina have laws in place which put a limit on an employer’s rights to an employee’s company or invention as long as it was started with their own time and resources. It may be worth it to seek legal counsel in this area as one wrong move may give your employer claims to your new business.
5. Protect Your Intellectual Property
If you have a tech startup you’ll need to protect your company’s intellectual property in addition to avoid infringing on that of others. One of the main benefits of protecting your company’s intellectual property is that it prevents other companies from entering your niche and competing directly with you. The most common way of protecting intellectual property is via filing a patent or a trade secret.
It’s important to file a patent as soon as you can as it can take up to five years to have a patent issued in the U.S. Employees and independent contractors should also sign non-disclosure agreements.
A potential lawsuit or legal problem will scare off potential investors and can lead to financial havoc if you’re a small startup. Planning ahead will help you avoid legal hassles so you can focus on growing your business.