Learn how to avoid common legal problems when running a business with key insights on startup challenges and solutions.
At a recent networking event, we were asked by a business owner about common legal problems that may arise in start-up businesses and how to avoid those problems. Reflecting on that discussion, the following are some key legal issues that start-up businesses should be aware of, as well as potential solutions to those problems:
Choose a Proper Legal Entity
Choose a proper business formation (a corporation, limited partnership, etc.) and capital structure (types of securities it is issuing to its investors) that best suit the goals of the business and protect its founders, from legal, tax, and investment perspectives.
Make sure all business activities are conducted through the business entity to avoid personal liability of the founders. From the liability standpoint, conducting business through a corporation would be a wise decision in certain circumstances. Be sure to seek legal advice prior to choosing your business formation.
Create and maintain your corporate minute book (articles of incorporation, by-laws, share certificates, directors and shareholders’ resolutions, registers, ledgers, etc.).
Define the Rights and Obligations of Founders
Define the roles and responsibilities of the founders by creating a proper shareholders’ agreement addressing such critical matters as corporate governance and decision making (unanimous, super-majority, simple majority, etc.), capital contribution expectations, voluntary and compelled exit scenarios, share valuation, and other matters.
Impose restrictive covenants on the individuals with fiduciary responsibilities for the business, including non-competition, non-solicitation, and confidentiality requirements, in order to protect the business’s intellectual property, goodwill, and confidential information.
Create a dispute resolution mechanism among the fiduciaries, in order to resolve the differences among stakeholders in the most efficient manner.
Create and Protect Business and Domain Names
Protect the business’ right to its business and brand names, logos, and domain names before registering a corporation with a particular name.
Keep in mind that, unfortunately, it is a common practice for some third parties to monitor registering corporations and register trade and domain names with such corporate names, and then leverage money from such corporations by selling those names to them.
Protect Intellectual Property
Implement an IP strategy including the creation, acquisition, and protection of IP assets.
Protect your corporate IP assets at the start of business with confidentiality and non-disclosure agreements, copyright, trademark, and other proprietary rights registrations.
Document Material Contracts
Beware that “contracts are never needed until they are”, as an old saying goes.
Document your relationships with your suppliers, customers, and any other third parties by written contracts, even with friends and family members.
Document Your Relationships with Contractors and Employees
Beware of the important differences between employees and independent contractors of a corporation, and potential personal liability of directors and officers for unpaid employment entitlements, deductions, and sales taxes.
Make sure you properly document your corporation’s relationship with its employees and independent contractors before starting that relationship.
Create Privacy Protection, Terms of Use, Terms of Sale, and Other Online Documents
Beware that certain online activities, as well as the mistreatment of personal data, may expose a corporation and potentially its founders to serious liability, both civil and regulatory.
Create proper online contracts as well as corporate policies and procedures, including website terms of use, terms of sale of your goods or services, and privacy policies.
Train your team to comply with the above corporate policies and procedures.
Comply with Securities Laws and Regulations
When raising private funds, ensure you do so through a proper prospectus exemption, as consequences for securities non-compliance may be very harmful to the business and its founders.
Consult a lawyer before offering securities (shares, debt, or otherwise) to anyone other than founders.
To summarize, some legal mistakes may be very harmful to a business. The above are just some more common examples, and there are many others. To avoid them, it is recommended to engage professional counsel (e.g, legal, tax, financial) from the earliest stages of your business.
If you need legal advice, please reach out to Boardwalk Law – our team is here to help. Contact Associate Lawyer Brian M. Murphy or learn more about our Corporate Law services.
