Not all startups make it to the big leagues. Which is often a result of the major business and legal troubles that they face down the road.
While it’s completely normal for a company to face challenges, most of these mistakes are easily preventable, as long as founders and business owners take the right steps and processes very early on.
To prevent major setbacks in your startup company, below are some of the “rookie mistakes” that a startup should avoid making.
- 1 1. Not Signing a Clear Deal with Co-Founders
- 2 2. Not Setting Up the Company in the Right Structure
- 3 3. Picking Trademarked Names as a Company Name
- 4 4. Not Getting Proper Business Permits and Licenses
- 5 5. Not Protecting Proprietary Information
- 6 6. Bad Contracts
- 7 7. Not Hiring Experienced Legal Counsel
- 8 Final Words
1. Not Signing a Clear Deal with Co-Founders
When starting a company with a friend, a relative, or a business partner, you must always establish your business relationship very clearly and early.
Below are some of the most important terms that every founder must agree on:
- The split of equity among founders
- Roles and responsibilities of each founder
- Goals and visions for the company
- What happens to a founder’s shares if he or she leaves the company
- Time commitment required for the founders
- The process of decision-making for the company’s important business decisions (should it be a CEO’s sole job, via majority vote, or a unanimous vote?)
- Under what situations can a founder be removed from the company
- How will the sale of the company be decided
- What to do if a founder is not doing his or her responsibilities
Think of the founder’s agreement as a prenuptial. It serves to protect everyone’s interests in case of a falling out.
Doing this at the start of the relationship will help you save a lot of money and legal trouble in case anything happens in the future.
In the event of falling out, you will need to hire business dispute lawyers to help you navigate whatever dispute may arise in your company.
2. Not Setting Up the Company in the Right Structure
Another mistake that startups make is not structuring the business in the best way to suit their circumstances. Below are some of the business structure forms:
This is the right business form if you’re the sole founder of the company. In general, you don’t need legal documentation or fees for this business form, but you must acquire state and local permits.
The disadvantage, however, is when additional capital is needed from investors, this form will no longer apply. Also, in this form, creditors can directly sue the founders unlike in other forms.
If there are multiple founders, a general partnership is often the chosen legal form of business. The founders will have to create a partnership agreement to set the rules, roles, and responsibilities among partners.
In this type of business form, each partner is taxed directly on a pro-rata basis and is liable for the company’s debts. In general, this form of partnership is not recommended for startups.
A limited partnership is a business structure composed of two or more partners, where one is a general partner that manages and runs the business daily. The other partners are called limited partners.
In limited partnerships, the general partner has unlimited liability while the other partners have limited liability which means that they are not liable for the company’s debts that are more than their initial investment in the company.
Limited Liability Partnership
This is just like a limited partnership. The difference is that there’s no one general partner. Instead, all partners can contribute to the management side of things while having limited liabilities like the one we mentioned above as well.
Limited Liability Company (LLC)
Last but certainly not least, the LLC. A limited Liability Company is probably one of the best business structures available for startups.
Basically, an LLC is a business entity that has the protection of a corporation and the ability to pass through business profits and losses to the partner’s income tax return.
An LLC can be formed by an individual business owner, multiple partners, or a business. Each owner of the LLC is called a member and they have three main benefits:
- Members cannot be held liable, personally, for the decisions made by the LLC.
- Profits and losses can be divided among the members
- Creating and maintaining an LLC requires much lesser paperwork than most business forms
3. Picking Trademarked Names as a Company Name
When starting a company, always spend a good amount of time researching names for your business. Stay away from names that are already trademarked or have domain names attached to them.
Instead, choose names that no one is using but are distinctive and memorable. Doing this will not only save you from infringement lawsuits in the future but will also make your company easier to trademark and easier to remember.
4. Not Getting Proper Business Permits and Licenses
If you want to start your business, getting permits, licenses, or registration is non-negotiable. There’s just no way around it, so make sure you do your due diligence and get all the necessary documents for your business.
Depending on what type of business you’re starting, the required paperwork may vary. Below are only some of the most common documents you might need:
- Industry-specific permits
- State permits
- Tax permits or license
- City permits
- Health department permits
- Tax/employer IDs
5. Not Protecting Proprietary Information
If developing products, technology, or a service is the bread and butter of your company, you should not skip the part where you apply for patents, trademarks, copyrights, or anything needed to protect your intellectual property.
Having your employees sign confidentiality agreements can also help to property your proprietary information.
6. Bad Contracts
If you don’t know how to whip up a good contract, maybe you shouldn’t do business at all. After all, contracts are essentially the key piece in starting and maintaining great business relationships.
The rule of thumb is, although it’s good to have standard-form contracts, you must always tailor your contracts depending on who you’re dealing with, or what kind of business you’re about to enter.
Also, make sure to hire experienced contract lawyers to draft the documents and review contracts from other parties as well.
7. Not Hiring Experienced Legal Counsel
While it’s completely understandable for startups to cut expenses, hiring inexperienced legal counsel is inexcusable. If you want your startup to succeed, one of the things that you must do is put your money into a legal team.
A great legal counsel will make sure that your company adheres to the law to avoid legal problems, not attract them.
When choosing a legal counsel, ideally, you’d want someone who is well versed in many legal areas like corporate law, contract law, and tax law, among others.
If you have a startup company or you’re planning to build one, always seek legal advice from experts in the field to make sure that your company is guided, legal-wise, to avoid mistakes that may cost you your entire business.