The legal risks startup owners should be aware of and prepared for
Launching and running a startup is a challenging endeavor for many reasons. It’s easy to think it’ll be smooth sailing after you get over the first hurdle—coming up with your business idea—but that’s rarely the case.
Between honing your product or service, identifying a successful market, petitioning investors, developing a brand, and a myriad of other launch challenges, there is a daunting number of ways your startup could fail. Don’t let legal trouble be one of them.
Failure to comply with the law or being flippant with your attention to legal detail could harm your business down the line. The good news is that, of all the things that could go wrong when launching a startup, protecting yourself and your company from legal problems is one thing that you can control.
Here are some of the most important legal risks you should consider when developing and launching your business.
1. Improper legal structure
The single most important decision that new business owners must make is determining the appropriate legal structure for their venture. This one decision affects the funding options for the new company, tax responsibilities, how easily they can sell the company, and the personal liability of the business owners.
Certain legal structures can help the company save on taxes, or become more attractive to investors. Meanwhile, selecting the wrong structure can result in the owners being exposed to personal liability lawsuits. Before you do anything with your new business, make sure you’re familiar with the pros and cons of different business entities.
2. Lack of employee contracts
You’re probably looking forward to hiring and bringing aboard an outstanding team to help grow your business. Failing to maintain proper employment documentation, however, can sink you before you’ve even begun.
It’s crucial that you hire an employment law expert to draft your employment agreements and contracts. These documents should contain the terms and conditions of employment and clearly define an individual’s duties and compensation—for both permanent and temporary employees. Most employment contracts also specify that employment is at will and can be terminated at any time for a valid, non-discriminatory reason. Additionally, any business should provide all employees with a handbook that clarifies company policies such as vacation, healthcare, and benefits, to avoid confusion or potential lawsuits down the road.
3. Generic website terms and conditions
Many businesses will use boilerplate terms and conditions or privacy policies that they found online. However, your business is unique, and it’s unlikely that those legal documents will fully protect you from lawsuits. With that in mind, hiring a lawyer to draft terms and conditions that are specific to your website and your company policies is essential.
4. Personal liability
A lawsuit against your company is bad, but a lawsuit against you can mean financial ruin. Of course, the easiest solution is to not get sued, but in today’s litigious society, that’s not always possible. Barring that, don’t let yourself be personally liable for your business’s legal issues.
This harkens back to when you first set up your ownership structure. You may have set the company up in a way that protects yourself. However, if you’re putting a large amount of personal capital into a business, mixing business and personal funds, or not properly adhering to the structure you initially set up, you could be vulnerable to both financial losses and personal liability.
In addition, if you use personal collateral or make personal guarantees to fund your business, you must follow through on those guarantees or repay those loans. Otherwise, it may not be just the company that you lose.
5. Intellectual property infringement
In the world of art and culture, we tend to say nothing is truly original. That sentiment may not be quite as true in business, so it’s always better to err on the side of caution.
Intellectual property law is complex, obscure, and requires highly specialized knowledge. Depending on what you’re trying to protect, you’ll need to determine whether to file for copyright, trademark, or patent protection. Especially if you’re launching a company in the tech space—where businesses fight tooth and nail to protect their intellectual property—you should hire lawyers who understand not just intellectual property law, but as it pertains to your specific industry as well.
Ultimately, many products and services look the same or borrow ideas from others. However, if you consult an intellectual property attorney before launching your business, you’re in better shape to survive any infringement lawsuit.
Launching a startup takes tenacity, ingenuity, and a bit of luck. It also involves doing your due diligence.
You can’t control all of the bumps and breaks your business will experience, but you can set yourself up to avoid succumbing to legal issues. Both by being aware of the legal risks of starting a business and by engaging the services of legal experts who can help you navigate those risks, you’ll go a long way towards keeping your startup on track.
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