5 Common Legal Mistakes Which Can Ruin a Startup

In your earliest days as a new startup, you will be busier than you have ever been before, and this can easily lead to significant mistakes with equally significant legal ramifications.

When you are building up, developing and managing your new startup, there are many things which will be plaguing your mind. Unfortunately, for some startup entrepreneurs, these things will cloud the mind and prevent them from focusing on things which really matter, such as the legal matters and aspects surrounding their new startup.

Proper attention to a few legal requirements and issues when starting out as a new business can make a massive difference to your long-term success and can prevent your startup falling victim to legal problems which can have fatal and expensive consequences.

Here are five of the most common legal mistakes which can destroy new startups.

Choosing the Incorrect Business Structure

This is the most common mistake which often carries the most significant problems. Choosing the wrong business structure can massively alter the dynamics and legal status of your business, opening up all kinds of wormholes and problems.

The legal statuses available to businesses vary around the world but, in general, they are –

  • Sole proprietorships;
  • Partnerships;
  • Limited companies (private and public); and
  • Corporations

What your startup is registered as will affect the taxes you owe, your personal liability and the overall legal status of your company as an entity. Each individual business structure comes with it its own merits and pros and cons, and you need to carefully consider each legal structure within your country’s jurisdiction to decide on the right one for your startup.

Choosing the Wrong Bank Account

Picking the right bank account is important for two reasons: i) you need to keep your personal and business finances separate and ii) because you can access lots of useful financial services should your business need them.

As you get bigger, you will need to scale up your business to cope with the increased demand. Hiring staff, getting extra office space or premises and marketing all cost money, and you may not be able to afford to fund all this from your turnover initially. This is where having the right business account helps, because you can access loans and funds specifically designed for up-and-coming businesses. By this point, you have proven your company’s worth to the banks and they are likely to provide financial help.

Not Protecting Your Intellectual Property

Intellectual property is a valuable asset – it can be the very thing which makes a business a success. Unfortunately, many startup companies suffer the theft of intellectual property because they do not properly protect it. Whether your intellectual property is your logo or your product, not having the proper protection in place leaves them vulnerable for theft.

Intellectual property protection typically comes in the form of patents, copyright or trademarks, and the one which you will need depends on what you are protecting. Copyright tends to protect artistic expression (literature, illustrations and design) whereas patents protect ideas and inventions.

Not Reading Legal Agreements

In your early days, your company is not going to have a legal department to read legal agreements on your behalf. When you are contracting with any other agency or are taking out any form of service which has a Terms & Conditions, you need to properly read them before you tick the ‘I Agree’ box or sign a legal agreement on behalf of your startup.

You should always be reading the legal agreements into which you are entering so that you know exactly what you are agreeing to. If you were to ever have a legal dispute with a client, buyer or any other person or entity with whom you work, your signature at the bottom of an agreement you have not read could be fatal.

Undefined Roles & Responsibilities

If you are a multi-founder operation, you need to ensure that each individual’s role is clearly defined down to the very specifics of it.

Who in the organisation owns what? Who does what? Whose responsibility is this and that? If roles and responsibilities remain undefined, it is a recipe for disaster, conflict and confusion – just look at what happened with Facebook – and to avoid this, you need to have a written agreement between yourself and all other co-founders, owners and partners to clarify each party’s respective rights, ownership and degree of control. Doing this will prevent conflict in the future, which can prove expensive and fatal.

Many new startups make silly mistakes when it comes to their legal obligations and, unfortunately, these can sometimes be fatal and kill it before it’s had a chance to be successful. By ensuring that you meet your legal obligations, you will avoid any headaches in the future and stand the best chance of success.

kathayat
I am a blogger and have 10 years’ experience in marketing and my core focus is to build my authority as a blogger and I am doing this by writing actionable, useful and engaging contents.