Top 5 Legal Tips for Startups

Tue, Sep 4, 2012


Launching a startup company can be a daunting proposition. You’ve nailed down the service you can provide, the products you want to manufacture, or the niche you aim to fill in your industry, but now it’s time to handle all of the legal setup that’s required. It’s an incredibly exciting time, but you can’t let those important details fall by the wayside. There’s nothing more disappointing than investing your time and money in a new venture just to see it fail because of some organizational loophole. You’ll find many pitfalls along the way, so follow these top five legal tips for startups to help guarantee the best chance of success.

First of all, make sure you choose the proper entity of incorporation. There are many options for how to structure your business. The most common are partnerships, C-Corporations, sole proprietorships and the Limited Liability Corporation. None of them are perfect, so you have to choose the one with the strengths that most closely fit your needs, and the least amount of weaknesses. When it comes to the partnership or sole proprietorship, the main strength is that any income that comes through the company is taxed as personal income, and only taxed one time. But you’ll find no liability protection going these routes. The C-corporation is probably the most common entity for startups, and it does offer liability protection for the shareholders. However, the income can be taxed as both personal and corporate income, and you’ll have to manage a stricter structure of shareholders, officers and directors. The Limited Liability Corporation is a newer entity, a mix of a partnership and a Corporation. You won’t have to deal with shareholders, and you will have liability protection. However, the contract is intricate, usually requiring significant attorney hours, and since it is only about twenty years old, the laws governing the LLC continue to change.

Once you’ve chosen your entity, you must make sure you perform proper due diligence on your corporate name. The process of launching a startup is expensive and time-consuming. The last thing you want is to file all your papers just to find that the name you chose is already in use by another entity. That could lead to angry disputes, and even a lawsuit. Once you’ve incorporated it may be too late to avoid these problems. So take the time to search the corporate name databases on the county, state and federal levels before submitting your paperwork.

Another important legal step is making sure you don’t mix personal and business funds. Regardless of the corporate structure you choose, you must follow all financial rules to the letter. That means keeping your accounts separate from the business accounts, and making sure your company always has capital on hand to operate. Disregarding this step could open you up to additional lawsuits, and you’ll lose the liability protection you thought you had.

Also make sure you are protecting your intellectual property. Your company’s IP could be the most valuable asset you have, depending on your industry. So take the time to copyright, patent or trademark all your original content. And when you are ready to hire employees, either full-time or part-time, make sure they sign an employment agreement that specifies the work they are doing is “for hire”, and you maintain all copyright ownership.

Finally, take the time to prepare for all results, even the worst case scenario. Most startups don’t want to think about failure right out of the gate, but it’s important that you are prepared for it if you are one day faced with the demise of your business. Any Atlanta injury lawyer would tell you about innumerable businesses that have failed because of unexpected accidents, none of which have anything to do with your business. So when starting the company, build in an exit clause for all of the partners. That way you can move on and focus on the positives, knowing you are also well prepared for the worst.

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