5 Common Legal Issues Faced by Startups

5 Common Legal Issues Faced by Startups

1. Naming the Company

Your company needs a name before it can be registered and proper branding can begin. There are plenty of resources available on how to create a great business name, so I won’t discuss those here. Instead, naming your company in the context of avoiding legal issues comes down to proper due diligence.

Doing this before your business gains significant traction ensures nobody comes after you for using their name, or that you’ll have to front the cost to go after others who might have knowingly or unknowingly used your name because it wasn’t properly protected.

When you file to incorporate the business in your state, the secretary of state’s office will run a search to make sure no other business in the state is operating under that name — no work needed on your part here.

It’s up to you, however, to ensure there are no other businesses operating in the other states or provinces in the country. The easiest way to perform due diligence on your proposed company name is to do a free search with your Federal Patent and Trademark office. All countries have them and most charge nothing to search.

2. Failing to Incorporate Early Enough

To incorporate or not? That is the question faced by all startups. A cheap lawyer will charge around $100/hr to file your incorporation paperwork — the good ones will charge over $300/hr. This is big money to a fledgling company budget.

Many founders will choose to postpone this, to save on costs and to see what kind of traction the business gets before jumping all in. This can definitely save a few bucks now, but it becomes a legal and financial nightmare much quicker than you might think.

Aside from the thousand or thousands you’ll pay your lawyer eventually, there’s really no savings associated with failing to incorporate right away. In fact, it’ll quickly cost you more when it comes time to file your taxes as a sole proprietorship or partnership instead of enjoying the deductions available to a corporation.

Then there’s the issue of “unlimited liability” (ie., legal issues) faced by the owners if something should go wrong. Imagine what the legal fees will be to fix the countless issues that could arise, just because you wanted to save a few thousand dollars?

3. Founder Issues

Founder issues come up because of failure to consult with a business lawyer and iron out a proper foundership agreement. Plain and simple. This is the number one problem faced when more than one founder is involved with the business.

Trust in the fact that each of you will incur thousands in potential costs when your business is thriving — or perhaps declining and you want to get out — just to save the $1000 for a decent lawyer to draw up the proper paperwork — if you neglect this step.

Think of this step much in the same way you would a prenup. Hopefully, you’ll never need it, but you probably know at least a few people who are glad they had the foresight to get one!

4. Intellectual Property Woes With Partners

There are a number of businesses that rely on their intellectual property to uphold their brand in the marketplace. While most businesses are aware of the importance of getting patents and ensuring proper security to keep intellectual property out of the wrong hand. However, it becomes a big issue with partnerships.

In a nutshell, you need to apply for an Intellectual Property Patent and wait for it to go through the checks and measures performed by your Federal government. This is also crucial to have if you ever sell the company, as the valuation can be hindered without these documents.

If one partner comes into the business with IP used in the business, you need assurances that they haven’t stolen it from a previous employer. These provisions can be addressed in the partnership agreement.

5. Investor Problems

There are a number of investor problems that can crop up at any time during the ownership of a company. However, the worst is when inexperienced startup founders enter into shady, non-vetted investment arrangements.

Look into the investor’s portfolio before visiting your lawyer (for the umpteenth time at this point) to have them look over the legal paperwork your investor gives you to look over before signing a contract or cashing any checks.

Closing Thoughts

If you take care of these 5 legal issues, before they become an issue, you’ll be well on your way to owning an ironclad business that’s on the up-and-up, without causing you more than your fare share of legal headaches.


Main Image Credit: Fort Belvoir Community/Flickr

Related Post

The business world should not be boring. Agreed?

If you say “Absolutely!” please sign up to receive weekly updates from the extraordinary world of business, hand-picked from the web just for you.