“Starting companies is a lot like launching rockets: if you’re a tenth of a degree off at launch, you may be a thousand miles off downrange” – Craig Johnson
One of the most common mistakes start-ups make is not seeking legal advice when founding their company. While financial resources may be strained during the start-up phase of a business, having a solid legal foundation in place can help avoid major (and expensive) headaches down the line. Here are some important legal considerations for any entrepreneur starting a new company.
For any new business venture it is essential to decide what legal form the company should take. The three most common business forms are sole proprietorships, partnerships and incorporation. Choosing which structure is right for your business is dependent on a number of factors, such as potential liability, and can have significant tax consequences for your company.
Disputes between co-founders are quite common and are much easier to resolve when there is a clearly drafted shareholder or partnership agreement in place. These agreements should cover issues such as how ownership of the company is to be divided, roles and responsibilities of founders, issuing new shares and vesting rights among many other things.
It is critical to define the expectations as between the employer and employee from the outset of the employment relationship. Every start-up should have a group of core employment documents that are signed by all employees. These employment documents should cover, among other matters, stock options, confidentiality agreements, non-compete agreements, ownership of IP developed for work and severance upon termination.
For many start-ups (especially tech companies) intellectual property is your company’s single biggest asset and key competitive advantage. Protecting this asset is of critical importance. It is equally important however to ensure that your company avoids infringing on the intellectual property rights of others. Some key considerations in this area include copyright, patents, trademarks, licensing agreements and as mentioned above confidentiality agreements for both employees and independent contractors.
If your company is raising money from outside investors there are securities law issues that must be considered. Generally the sale of shares must comply with certain regulatory and disclosure requirements; however there are also a number of exemptions from these requirements such as those for accredited investors. In addition to this, there are a number of government grants and programs available to small businesses to help accelerate your company’s growth.
Standard Form Contracts
Having a standard form contract for customers and suppliers can save time and money and ensure that you have defined key terms such as price, when payment is due, potential liability and how disputes will be resolved. While most contracts will still have to be negotiated and tailored to the specific situation having a contract that clearly sets out the obligations of both parties makes it much easier to seek legal recourse should the other party fail to pay or breaches the contract.
Keeping detailed records and documentation is vital to running a successful business. This is especially true for corporations as there are a number of legal requirements regarding documentary records such as the keeping of a minute book of all shareholder meetings.
Starting and running a business is a challenging but rewarding proposition. A solid legal foundation provides your company with the best opportunity to be successful and grow. An experienced corporate lawyer can help guide you through the many challenges and issues associated with starting a new company and help you to position your business for future success.
This article was written by business and financial lawyer Adnan Chahbar. If you have any questions about the information contained within this article, do not hesitate to contact Adnan by calling 519.660.7804 or emailing [email protected]