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6 Big Legal Mistakes Often Committed by Startups

Via All Business Experts : There’s a lot to cover when you’re launching a startup. While some of the details may seem insignificant, others should be taken very seriously and addressed immediately.

The unfortunate truth is that many entrepreneurs hold off too long making essential decisions, or they overlook critical components of their business plan and end up in legal hot water.
Culprits of Business Failure

When you study failing businesses, it can be difficult to pinpoint the exact point at which everything started to go wrong. With so many variables at work, every poor choice or failure of foresight can have a direct effect on an array of other elements.

And though that can be scary for young entrepreneurs and founders of startups, avoiding common mistakes can reduce much of the risk.
Six Big Legal Mistakes to Avoid

If you want to play it smart, you’ll do your best to avoid the following six legal errors that too often doom startups from the get-go:

Forming the wrong entity. There are five different types of business entities, generally speaking: C corporations, LLCs, partnerships, S corporations, and sole proprietorships — and each involves its own nuances, benefits, and disadvantages. According to Ryan Anderson of Bighorn Law, a firm that frequently interacts with corporations on behalf of employees, “The problem for a lot of startups is that they choose the wrong entity from the start.” This can result in major tax disadvantages and may limit future flexibility.

Failing to comply with securities laws. While it can be tempting to sell securities freely, it’s critical to pay attention to state-specific and SEC rules prior to soliciting or selling any stock. A failure to comply can lead to stiff financial penalties for both the startup and its founders; you may even be compelled to repurchase the shares at the original issuance price.

Not clearly defining roles. You’re all friends, right? Well, regardless of the preexisting personal relationships between you and your colleagues, it’s essential for you to define the roles of every initial team member clearly and fully. Who gets what percentage, who’s responsible for which tasks, and what happens if the founder leaves? There are dozens of questions to settle up front. If you want an example of how serious this issue is, just check out the multiyear legal battle that took place between Mark Zuckerberg and two of his former college classmates.

Not considering intellectual property. For startups with proprietary products or processes, intellectual property protection should be a major priority to investigate at the start. Among the items you may wish to consider are patents, trademarks, service marks, copyrights, confidentiality agreements, and trade secrets.

Lack of due diligence. If you’re launching a startup, the words “due diligence” should become your best friend. From the company name you choose and the people you hire, to the investors you bring on board and the advisors who guide your decisions, it’s extremely important to check and double-check everything. Otherwise you could end up in serious legal trouble down the road.

Not having a lawyer. Does the above sound like a lot of work? Well, it may unfortunately be only the tip of the proverbial iceberg. Founders have a lot to consider with regard to the legal foundation of their ventures, and most shouldn’t attempt to handle all these issues on their own. Hiring a good business attorney can enable you to rest easy at night and protect your new business.

While this is by no means a comprehensive list of all possible legal pitfalls, it’s a good place to start. Keep these six errors in mind and you’ll be better off than most.

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