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Avoiding the Top 8 Legal Mistakes Made by Startups

Several startups initially find themselves in legal fixes, whether due to an approach driven by passion rather than practicality or simply a lack of experience. Besides, startups require a lot of work, and it is easy to overlook the legalities.

However, neglecting your business's legal obligations and responsibilities can cost your startup heavily. Read on to learn more about some of the most common mistakes growing companies make and how you can avoid or, if need be, tackle them.

Top 8 Legal Mistakes Made by Startups

  1. Failing to Incorporate Properly

Deciding what legal form you wish to operate your business in is one of the first and most important decisions you’ll have to make as an entrepreneur. You can opt for different business entities such as sole proprietorship, LLP, corporations, partnerships, etc. These decisions require careful consideration of tax laws, liability, and, lastly, the company's vision. It is best to take the advice of a legal professional and a business accountant.

  1. Not Protecting Intellectual Property

One of the most common mistakes made by startup owners is failing to adequately protect their intellectual property. Protecting their innovations is especially important for startups if they want to gain an edge over the existing and well-established players in the market. Creators and brands protect their work from infringement through legalities such as patents, trademarks, copyrights, etc.

  1. Improper Founder Agreements

The unpredictability of the business landscape can affect the dynamic between the founders. In such a situation, not having a well-defined record or company founder's agreement on the roles, responsibilities, and rights of co-founders in business can lead to severe conflicts.

 

It is important to draft a proper, well-defined agreement with the company founders to avoid this. The critical considerations while drafting such an agreement are the breakdown of equity, decision-making powers, exit clauses, time commitments, operational responsibilities, and remunerations.

  1. Lack of Legal Contracts

You may feel that verbal agreements or handshakes are enough to be able to demand or enforce contracts for your business, but they aren’t! You’ll be surprised at the number of startups that have suffered heavily because of the lack of proper legal contracts. A well-defined legal document is essential for all your business dealings, whether with vendors, employees, clients, and partners, and even a business agreement contract with your friends or family.

 

  1. Equity Split Issues

Dividing the equity evenly between the founding members without vesting sounds like a great idea. Until individual contributions decline, your partners lose interest or even turn into ‘zombie founders.’ To avoid this, draw up a proper plan and shareholding agreements for individual commitments and contributions and a vesting schedule that you feel is appropriate for your company.

  1. Ignoring Employment Laws

Not complying with employment laws can be a big mistake for your startup, especially if it is not done early! Ensure that the proper regulations are followed for all employment laws, such as minimum wage requirements, probation periods, restrictive covenants, confidentiality agreements, etc. Activities such as purposely withholding information or misrepresenting employees as consultants can also lead to heavy penalties.

  1. Failure to Comply with Regulations

Industry research plays a big part in starting a successful business. Businesses must comply with several regulatory obligations, including federal, state, and local. Ensure you’re updated on all the permits, security law compliances, financial compliances, or health and safety regulations that are important for your industry.

  1. Not Understanding Legal Liability

Lastly, the importance of legal compliance should not be undermined in any case. Navigating the complexities of the business environment and legal obligations may seem daunting, but it is crucial to the success of your business.

Checklist of Legal Aspects for Your Startup

Have a look at some of the critical legal aspects you should not miss when starting a business:

 

  1. Business entity formation
  2. Tax considerations
  3. Licencing
  4. Contracts
  5. Trademarks
  6. Financing
  7. Employment law
  8. Insurance
  9. Compliance

 

Do a thorough background check when choosing a legal expert to guide you through these processes. Stay updated on your business's legal changes and requirements, and don’t trust anyone unquestioningly—especially with your business's legal matters!

Further Readings and Resources

For more detailed information and support for your startup, you can refer to the following resources-

Final Thoughts

Starting a new business is incredibly exciting; however, the importance of proper legal counsel cannot be undermined, which is why you should only go for the best. Mishoura can help you in your corporate journey. With a platform that connects you with the best corporate solicitors, you can receive the proper legal support and counsel as your startup evolves.

People Also Ask 

What is intellectual property?

Intellectual property refers to the intangible creations of the human mind. These include, but are not limited to, inventions, literary works, artistic creations, and designs by individuals or groups.

Why are legal contracts essential for startups?

Legal contracts can help your startup navigate the tricky legal landscape. Drawing up contracts can help you mitigate legal risks in your business dealings.

What legal liabilities do startup founders face if they neglect legal matters? 

Neglecting legal liabilities and obligations can result in heavy fines, taxes and penalties for your business.

Written By -

Omar Shams

Omar Shams

CEO & Founder at Mishoura.com

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