Starting a new business is fun, exciting, scary, and sometimes overwhelming. In our experience, this surge of emotion often leads to founders and entrepreneurs shooting first and asking questions later. Taking a deep breath and taking the time to think through the legal aspects of your startup is (admittedly) not the best part of the entrepreneurial experience, but it is the prudent, responsible way to ensure your startup sidesteps costly pitfalls as it develops.
Here are a few key legal items to put on your startup to-do:
1. Establish a Proper Legal Entity
Setting up the right legal entity is the only way to achieve your legal, tax, and investment goals. Corporations, limited liability companies (LLCs), partnerships, and other business entity types all come with their own unique advantages and drawbacks. Shield yourself from liability, make the most out of your tax strategies, raise capital the way you want to - entity formation is square one for your business venture.
2. Put the Founders' Vision On Paper
Get it in writing. Make clear each founder's role and responsibilities - determine who will do what in day-to-day operations. Figure out how key business decisions will be made. Sort out ownership percentages, and create a mechanism for dispute resolution among the founders.
If it isn't in writing, the applicable state's default rules will govern how your business will be run. More importantly, if it isn't in writing, you and the other founders run the risk of facing a future disagreement with no documented terms to help sort out the matter.
3. Clear Your Branding Before You Commit
Have a catchy brand name in mind? Don't just start using it without thinking about the consequences. If your brand name is similar to another, you could be in trouble.
Take the time to research federal, state, and common law trademarks to identify others who may have rights to your name and to determine where those rights exist. You may find that you will be unable to expand into certain geographic regions in the future, or you may find out that you can't use your brand name at all.
Regardless of what you find, it is better to find out sooner than later.
4. Create and Implement Your IP Strategy
Trademarks, copyrights, patents, and trade secrets. There are many systems in place to help you protect your ideas and retain what is often the most valuable part of a company. Start thinking about whether you need to register you creations, or whether they are more valuable undisclosed.
Ensure that you company has been properly granted to the core intellectual property that has been or will be contributed by its founders, employees, and third parties, and have a good non-disclosure agreement to use before sharing sensitive information that could be misappropriated.
5. Think of Your Employees
Make certain you are in compliance with federal and state wage and hour laws for all employees, have in place employment agreements and workplace policies that clearly lay out the conditions for termination and severance, and keep your employees happy by having a plan for payroll and benefits. It is also never too early to structure an equity plan to incentivize commitment and encourage hard work within your team.
6. Classify Your Independent Contractors Correctly
You can't just call someone an independent contractor and have it be the case. The way you treat and interact with someone is what really determines whether that person is an employee or independent contractor. Familiarize yourself with the differences between an employee and an independent contractor and make sure you classify your workers accordingly. Misclassification could cost you overtime pay, employee benefits, taxes, and penalties down the road.
7. Institute Company Policies for Online and Mobile Activities