10 Legal Mistakes Made by Start-Ups

INTRODUCTION

You might experience serious business and legal obstacles when starting a new company. Entrepreneurs and new businesses have a history of making plenty of errors. The following are a few of the more often and serious legal errors committed by startups and small businesses. These errors occur throughout the early stages of a company's development, when dealing with employees, and at the time of the company's establishment.

1. 1: Not Making the Deal Clear with Co-Founders.
2. If you establish your business with co-founders, you should decide on the specifics of your business arrangement early on. The iconic Zuckerberg/Winklevoss Facebook dispute is a prime example of how failing to do so could lead to serious legal issues in the future. The founding agreement might be viewed as a type of "prenuptial agreement." The following critical deal terms must be covered in your documented founder agreement:

• 5119. will the founders' equity be distributed?
• Is the proportion of the company that each founder founded susceptible to vesting based on continuous involvement in the business?
• What are the founders' duties and responsibilities?
• Does the business or the remaining founders have the right to repurchase shares from a leaving founder? If so, what does it cost?
• What level of time dedication is anticipated of each founder to the company? What limitations will be placed on outside obligations?
• What wages, if any, are the founders eligible to receive? How might that be altered?
• How will the company's daily and important choices be made? (Are some choices made by a simple majority, a majority vote, or the CEO alone)
• How and when can a founder be discharged from their position as a company employee? (Normally, the Board of Directors would decide this)
• What resources—cash or otherwise—does each founder contribute to or invest in the company?
• How will a business sale be decided upon?
• What transpires if a founder fails to fulfill their obligations under the founder agreement?
• What is the business's overarching purpose and mission.

1. 2: Not Starting the Business as a Corporation or LLC
2. What legal form to operate the business under is one of the founders' initial choices. Founders frequently launch firms without seeking legal counsel, which results in greater taxes and major liabilities that could have been avoided if the company had been set up as a corporation or a limited liability company ("LLC").
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4. 3:  Choosing a Company Name That Has Trademark Issues, Domain Name Problems, or Other Issues.

• • To avoid trademark infringement issues or domain name issues and to make sure the name you choose is legitimately available to use, research is crucial when choosing a company name. If your use of a mark is likely to confuse customers as to the source of the products or services, you may be violating someone else's trademark. The following actions should be taken to prevent naming issues:
• Do a Google search on the name to discover if any other businesses are already using it.
• Check the U.S. Patent and Trademark Office website to see if your suggested name has any federal trademark registrations.
• Find out whether anyone else is using the same or a similar name by searching Secretary of State corporate or LLC records in the states where the company will conduct business.
• To check if the domain name you want is available, perform a search on GoDaddy.com or another name registrar. If the ".com" domain name is already taken, this may indicate possible prior use and is a warning indicator.
• Make that the name stands out and is memorable.
• You might think about asking your intellectual property attorney to conduct an expert trademark search.
• Avoid choosing a name that will be too restrictive and force you to change it as your company grows or changes.
• Create five names you like and test-market them to potential coworkers, business partners, investors, and clients.
• Consider the name's potential worldwide meanings; for instance, you don't want to pick one that might have an offensive implication in a different language.

         4. Not Complying with Securities Laws When Issuing Stock to Angels, Family, or Friends

1. In the event that founders establish a corporation, limited partnership, or LLC, federal and state securities laws will apply to the sale of stock, limited partnership interests, or LLC interests to founders and subsequent investors. Unless in cases where an exception applies, most securities laws provide that such sales must adhere. Even if the startup company has lost most, if not all, of the money it raised from investors, failure to comply with applicable securities laws requirements can result in significant financial penalties for the founders and the startup company, including a requirement that the company repurchases all shares sold to all investors in the illegal offering at the original issuance price of the shares. Failure to abide by the securities laws can also result in fines and other sanctions (civil and criminal). Founders should retain skilled attorneys to properly document the sale of shares in accordance with such laws in order to avoid such detrimental (perhaps fatal) effects on specific disclosure, filing, and form requirements.
2. 5. Not Adequately Taking into Account Important Tax Considerations
3. Startups must be aware of a number of crucial tax concerns that are pertinent to their operations. Without adequate planning, founders may be held responsible for unwanted and unplanned taxes, fines, and penalties on themselves or their startups. Many important tax matters to think about are listed below:
4. Acquire a Tax ID- The IRS often requires that you obtain a tax ID for your business. Similar to a Social Security number, but for businesses, this is also known as an "Employer Identification Number" (EIN). As soon as you open a business bank account, banks will ask for your EIN. The IRS website offers an online EIN application service (the process is simple and quick and an EIN is issued immediately). In some states, a state tax ID could also be required (for example, California, New York, and Texas require a state ID, which can also be obtained online).
5. Article 83 (b)- The possibility of using an IRC Section 83(b) election to reduce potential tax concerns should be considered by the founders and workers. A Section 83(b) election can reduce the amount of income that is considered to be taxable at ordinary income tax rates to the recipient when they receive stock or options that are subject to vesting.
6. Tax Incentives- Several tax incentives, such as investment tax credits and credits for renewable energy, may be offered depending on the type of firm.

6. Not Having the Right Legal Counsel

1. Startup companies frequently use inexperienced legal counsel, including attorneys who are friends or family or who offer large fee discounts, in an effort to cut costs. By doing this, the founders deprive themselves of the guidance of knowledgeable legal counsel, who could assist in avoiding many legal issues.

1. 8: Not Carefully Considering Intellectual Property Issues
2. If you have created a novel good, technology, or service, you should think about taking the necessary precautions to safeguard your intellectual property. The founders and investors of the company have a vested interest in seeing that the business upholds its intellectual property rights and refrains from violating those of others.
3. 9. Not Determining Which Permits, Licenses, or Registrations You Will Need for Your Business
4. Depending  the type of business, you might require the following authorizations, licenses, or credentials:

• Specialized licenses for regulated businesses (aviation, agriculture, alcohol, etc.)

• State requirements for conducting business

• Licenses and permissions for sales tax

• Permits for home-based businesses

• County and city business licenses or licenses

• Zoning approvals

• Seller's licenses

• Department of Health approvals (such as for a restaurant)

• Tax and employer identification numbers from the federal and state governments.

10. Not having a Good Terms of Use Agreement and Privacy Policy for Your Website

A term of use agreement outlines the guidelines for how visitors to your website must behave. Your website's privacy policy serves as a legal declaration outlining your practices for handling the personal information you gather from visitors and customers, as well as how that information may be used, sold, or disclosed to third parties.

Decent terms of use contract will include the following provisions:

• The restrictions placed on users and how the site can be utilized

• Exclusions from warranties

• Liability restrictions for the site's owner, its officers, affiliates, and directors

• How disagreements will be settled (e.g., through confidential binding arbitration precluding class actions)

• Users' representations and warranties, as well as the site owner's indemnity.

1. Conclusion
2. Startups with a better chance of success than those who fail to foresee and plan for these legal dangers and mistakes are those that are able to do so. To prevent serious issues later, invest in planning and seek professional guidance.