Legal Issues of Startups
The legal considerations to start a business and legal mistakes to avoid as a startup
What are the legal issues of startups, what are the most common errors made by startups and what you need to consider before starting a new business?
When you are beginning a new venture it’s easy to get carried away by the spirit of starting something new and focusing on creating a new product or service. As focus is definitely a good thing, the legal compliance may seem unimportant and is easy to be omitted or put off. However, the lack of legal compliance is one of the most common startup errors and can have very painful consequences.
Here is a list of legal mistakes made by startups which you want to avoid and prevent from growing into even a bigger problem.
Startup companies legal issues
Company formation structure
Right at the beginning of your business activity decide if you want to operate as a sole trader, a partnership or a limited company and make appropriate registrations.
Have a clear deal and equity allocation with the co-founders. When starting a business with co-founders, set clearly how you share the ownership between the people working for the business at the beginning. You should also specify what will happen if someone decides to leave the business and what will happen with their share.
Check if you need any permissions, registrations or licenses to run your business. There might be some industry-specific requirements (e.g. transport, alcohol) or country-specific regulations which you need to comply with.
Determine what taxes you will have to pay, not only for selling goods but also running your business. Check what local and national taxes apply as well as customs, payroll taxes, the tax levels depending on your turnover, profit etc.
Make sure to keep enough cash to pay the tax at the end of the accounting period. Not saving enough cash to pay the tax is an unpleasant surprise and a reason why some startups fail.
Many startup owners aren’t aware of this legal pitfall. Check if your business operations require any compulsory insurance such as public liability, employment-related insurance or others.
One of the most common legal issues for startups is following the employment law and deciding whether you want to offer employment contracts or hire independent contractors. Always make sure you have a written contract to avoid any misunderstandings. Know what is forbidden by law. Not following employment regulations may cause severe fines or legal actions. Make sure you hire correctly and have proper documentation when you hire people.
Tip: know what interview questions are prohibited by law
Be clear who is the IP owner right at the beginning to avoid future legal issues.
Data protection policies
If you handle or store personal data of your customers or employees you may need to comply with specific regulations. You may also be required to have a specific registration to do it. Also, make sure that your staff who handle personal data know and follow the relevant procedures.
Have a written confidentiality agreement with your employees and partners. What may seem obvious to you, may not be for others. This is important to protect your intellectual property and company know-how, especially when someone leaves the organisation.
Check existing trademarks when choosing a name for your business or product.
How to check registered trademarks?
You can either use a professional service or if you want to run an initial check on your own these are the websites you can use to check registered trademarks:
– World Intellectual Property Organisation
– United Stated Patent and Trademark Office
– European Union Intellectual Property Network
Legal statements on the website
This may sound trivial but it’s another thing that may cover you in the future when something goes wrong. Make sure your website includes all ‘the small print’ such as:
– Refunds Policy
– Limitation of Liability
Tip: do not use generic content for your website policies, make sure they reflect your business
Lack of due diligence
Do not regret spending time on making sure you have appropriate contracts, have agreements with partners and know the regulations. It is usually a one-off time expense which may save you a lot of time, money and stress in the future when things go wrong.
The above are the most common legal issues of startups. When you are starting a new company you have a lot to do and your focus is usually on delivering a product. You are probably extremely busy wearing many hats and legal compliance may not get the highest priority but believe me, it’s worth spending some time on it to avoid legal errors made by startups and may save you from big trouble.
What’s your experience?
What are your legal challenges or uncertainties you are facing as a startup? What legal challenges did you have to face in your business which you now know were avoidable? Share with us in the comments below.