6 Major Legal Mistakes Made by Startups and How to Avoid Them
| 4 minutes read
As they strive for success, startups consider a plethora of factors. Legal matters are typically low on their priority list, but a little legal forethought can assist in averting costly complications down the track. The following are some of the more prevalent and problematic legal blunders made by startups. These challenges usually emerge during the initial stages of a business establishment, early stages of scaling, or when handling the workforce.
Top 6 Legal Mistakes Startups Make and How to Avoid Them
1. Complicating the legal solutions and documentation
Legal solutions do not have to be sophisticated. Indeed, the more sophisticated the legal solution, the more issues may arise. More complicated solutions, for example, could be difficult to comprehend and implement and hence may be doubtful for investors. They may also be more challenging for a court to understand and, as a result, run the danger of being interpreted counter to the objectives.
Rather than creating complex legal papers, a wise entrepreneur should identify significant legal challenges and make sound, educated decisions about legal solutions. Ideally, the key legal challenges an entity faces can get sensibly resolved by the timely execution of clear, concise, and straightforward legal documents.
2. Not registering the startup with the proper business structure
The decision of how the firm will get constituted is a significant aspect while establishing a new business. Forming a structure from the beginning lays the groundwork for establishing and growing the startup. For example, determining whether to form a Limited Liability Company (LLC) or operate as a sole proprietor will impact how the business will run in the future. Since founders sometimes establish businesses without consulting legal professionals, they face more taxes and liabilities that could be avoided if the business gets structured as a corporation or a limited liability company.
Clarifying these issues during the registration process will enhance the business’s success in the long run. Help is ensured when this is done early during the foundation process. It will help mitigate risk if your company’s structure changes or gets compelled to alter in the future.
It’s imperative to know that you need a Registered Agent who should be available at their Registered office during business hours to accept any paperwork on behalf of your LLC.
3. Inadequate employee agreements in effect
Startups compensate people for contributing ideas, designing technology, devising a strategy, or developing products and offering solutions that may be valuable to the country’s success. Employees get access to the startup’s confidential information and trade secrets for executing their assignments. This data and information may be relatively significant, specifically in cutting-edge tech firms.
Therefore, if there are no employee confidentiality and invention assignment agreements in place, it could leave your startup’s intellectual property and proprietary resources vulnerable to manipulation and replication.
As a result, such agreements concerning the employee’s commitment to safeguard and keep confidential any inventions and trade secrets must get signed by all employees with access to the company data, information, and resources. It also ensures that the deliverables, ideas and other intellectual property created by the employee harnessing the startup’s resources belong to the firm instead of the individual.
4. Non-compliance with business tax legislation
New businesses unaware of their operations’ tax and financial implications could misinterpret their obligations and non-compliance with tax.
It’s essential to comprehend how and when you’ll need to pay your taxes, as well as to articulate protocols for doing so. Inability to do so may result in severe consequences, such as legal action.
If you are not an expert in tax relations, it is advisable to engage the services of an accountant to guide you with your tax policy and ensure comprehensive tax compliance.
5. Failing to comply with data-regulatory requirements
Despite recent revisions to data privacy regulations, many new enterprises are still not entirely complying when managing data. Any organization that collects or processes data must follow data-regulatory guidelines set by the state. It includes the company’s marketing tactics, collection of any client data, its rights, conditions, and privacy settings.
Make sure you understand all the requirements to comply with data legislation precisely and that your startup is operating accordingly. If you are doubtful, seek guidance to avoid severe fines or accusations later on.
6. Not employing suitable legal counsel
In an ill-advised attempt to save money, startups frequently hire inexperienced legal counsel, including lawyers who are either acquaintances or those who offer extensive fee concessions. Another typical mistake companies make is that they draft documents on their own rather than seek competent legal advice. While this may appear to be good at first, owing to cost savings, most business co-founders are unlikely to have the skills required to draft such papers appropriately.
As a result, the founders forego the assistance of professional legal counsel, which may help them avoid several legal complications.
Seek suitable legal counsel from an expert lawyer acquainted with your industry. A commercial lawyer can be a beneficial member of your team because they have legal experience and business knowledge in at least some domains like commercial and securities law, employment law, data security, cyber and privacy law, etc.
Startups that mitigate these typical legal errors have a much better opportunity of raising money and expand into profitable ventures. Companies that fail to foresee and plan for these vulnerabilities from the start put themselves at risk. Thus, as a startup, you should start investing in planning and professional assistance to avoid significant problems.