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7 Legal Mistakes Frequently Made by Startups

Posted by Kanika Sinha

May 7, 2018

You’ve created your business plan, designed a marketing strategy, created a budget, and planned for growth, but have you thought about your legal needs?

Since most startup owners aren’t lawyers, costly mistakes can happen. Let’s look at seven legal mistakes frequently made by startups.

Take these into consideration as you decide whether or not to hire an attorney to help you as they can mean the difference between a smooth-running startup and one that is beset with costly legal problems.

#1: Neglecting to Register Your Business Name

One mistake frequently made by new businesses is not researching their chosen business name.

You want to make sure no one is using the name you want to use for your startup. It doesn’t matter whether you’re a corporation or a sole proprietor, you still have to do your due diligence.

If you’re registering as an LLC (limited liability company), it’s required that you do a name check.

Infringing on someone else’s name can cause you legal issues. Designing a logo, creating a website, and other marketing will cost you money if you have to change your name.

#2: Forgetting the Standard Contract

It’s a good idea to develop a standard contract to use with your customers or clients. This protects both you and them.

This is an ideal place to seek the help of an attorney.

To get you started, here are some suggestions:

  • Look at other contracts in your industry. View samples.
  • Keep it simple and to the point.
  • Include limitations on your liability. You don’t want people suing you if your product or service doesn’t meet their expectations.
  • Include a clause to keep you from being liable if something unforeseen happens.
  • Add a clause on how you’ll resolve disputes.

#3: Making Hiring Mistakes

Hiring is a place where you can land in legal hot water if you aren’t doing things the proper way.

Sure, you want to hire employees, and you may be in a hurry to do so. But, this isn’t something to be rushed.

For starters, you need the following:

  • USCIS Form I-9
  • IRS Form W-4
  • Job descriptions
  • Non-compete contracts
  • Employee Handbook and policies
  • Benefit forms and explanation of benefits
  • Terms of employment conditions
  • List of standard operating procedures
  • Confidentiality and non-disclosure agreements

Many startups make legal mistakes here, so also be sure you are well-versed in federal, state and city and county labor laws. They vary by state, so you need to stay on top of this.

Your main goal here is to protect yourself from legal action, so be sure you have all the required documentation. Taking care of these issues ultimately protects your staff as well.

#4: Ignoring Your Intellectual Property

You want to have your copyright, patent and trademark info in place if this pertains to your startup. This protects your business’s’ intellectual property.

Trademarks are at the state and federal level; patents and copyrights are federal.

#5: Not Creating an LLC or Corporation

For most startups, you don’t want to begin business as a simple partnership or sole proprietorship. If you do this, you are legally mingling yourself personally with your partners’ and business’ finances.

What does this mean for you? It means your personal property; bank accounts and assets can be seized if the company is charged with legal action. You don’t want to lose your home, cars and money.

Avoid this by creating a corporation so your personal interests are separate from your business.

#6: Hiring the Wrong Type of Lawyer

Some startups may think “hiring” their brother-in-law is a good idea. If he’s a lawyer experienced with startups and venture capitalists, we’d agree. If not, we’d advise this startup owner to look elsewhere.

Don’t make the mistake of hiring the wrong lawyer. Hire one with experience working with startups and small businesses.

#7: Misunderstanding Securities Laws

Do you understand these laws? If not, seek legal help, otherwise you might get into securities trouble if you issue stock to angel investors, friends or family.

When you sell stock, you’re subject to federal and state securities laws. Failure to comply can result in major financial penalties.

Hire knowledgeable lawyers who know how to document the sales of your shares and stay in compliance.

Final Thoughts

It can be easy to take care of the most pressing matters first and leave others for a slower time.

Unfortunately, that can land you in some legal trouble. Don’t put off the important tasks mentioned here because many of them can’t be put off until later.

Hire experienced and competent legal help to guide you as you negotiate getting your startup off the ground.

Are you a new startup ready to succeed? Are you looking to get your new business off the ground and watch it rise to success? We are here for you. We can help answer your questions and guide you through the process. Outsource your HR duties, finances, payroll and more to us. Contact Escalon today to get started.


Kanika Sinha
Kanika Sinha

Kanika is an enthusiastic content writer who craves to push the boundaries and explore uncharted territories. With her exceptional writing skills and in-depth knowledge of business-to-business dynamics, she creates compelling narratives that help businesses achieve tangible ROI. When not hunched over the keyboard, you can find her sweating it out in the gym, or indulging in a marathon of adorable movies with her young son.

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