If you recently established your
startup, congratulations on your new business. Whether you left Corporate America
and this is your first company, or you’re a serial entrepreneur,
you will be faced with certain legal challenges that are unique to startups,
and you want to ensure that you navigate those properly.
As attorneys who represent business owners, we have seen first-hand some
of the biggest legal mistakes made by the owners of startups, and here they are:
Not laying the groundwork with co-founders early.
If you have co-founders, it’s critical that you all agree on the
deal early on. If you fail to accomplish this, you can face massive legal
problems down the road.
For an example, consider the Zuckerberg/Winklevoss Facebook litigation
where two brothers sued Zuckerberg for $65 million.
You'll need a founder agreement, which is similar to a prenuptial agreement;
you want to ask key questions, such as:
- What percentage of the company will we each get?
- Is that percentage dictated by continued involvement in the business?
- What are our roles and responsibilities as the founders?
- If one of us wants to back out, can the other founders buy back our share
of the company?
- Are the founders entitled to salaries, and if so, how much?
- How would we decide on selling the business?
Not choosing the right entity.
As a founder, one of the first decisions you make will be about
how to form your company. Often, founders don’t consult a lawyer and
they choose the wrong entity.
In effect, they are subject to liabilities and higher taxes, which could
have been avoided if they formed a corporation or a limited liability
company (LLC).
Failing to maintain proper employment documentation.
Many startups fail to maintain proper employment documents. What they
should have done is created stock option documents and “at will”
employment offer letters.
Other commonly missed forms, include:
- Employee handbook
- IRS Form W-4
- USCIS Form I-9
- Benefit forms for health and dental insurance and 401(k)s
Failing to account for all tax issues.
When you start a company, you must be aware of your tax liabilities, which
begin with your choice of legal entity. You must also consider sales tax,
payroll tax, tax incentives, reduced tax rates on qualified business stock etc.
We are only scratching the surface when it comes to the legal issues faced
by startups. Others include noncompliance with security laws, failing
to consider intellectual property protection, confidentiality agreements
and much more.
If you want your startup to have the greatest chances of profitability
and success,
contact the Chicago
business law attorneys at
Rifkind Patrick LLC for all of your legal needs.