Starting a business is hard. It’s even harder when you find yourself in a legal predicament. There are a lot of ways the legal foundation of a business can become shakier than desired, but some ways are more common than others. Many startups forget to make some pretty significant legal decisions at the very beginning. If you’re trying to get your business off the ground, make sure to square away the important legal aspects first.
1. Set Up a Co-Founder Deal
Unless you’re a one-person operation, you’re sharing your business with co-founders. Even if nothing ever goes wrong, you still need to establish what belongs to who. Outside of issuing payments, taxes, and responsibilities, you need to have some contingency plans.
If one of your co-founders gets married and moves to the other side of the world or has an epiphany that leads them to go back to school and learn an entirely new career, what will happen to the percentage of the company they own? What happens if someone gets burned out and stops doing a great job and the rest of the partners would like to replace that person? Set up a deal from the beginning – it’s similar to a pre-nuptial agreement for your business and it assures no one is treated unfairly.
2. Choose the Right Entity
Your business can be any number of things. Proprietorships, partnerships, and corporations all serve different purposes. The type of corporation you select can affect everything from your taxes to the way you receive business loans. Many startups begin as Limited Liability Corporations, but wind up needing cash. Changing to a different type of corporation can make your startup more appealing to investors. While it’s possible to switch later, it’s going to cost a lot of time and money. Use due diligence to select the right entity the first time.
3. Protect Your Intellectual Property
Everything you’ve worked so hard to create can be taken from you if you haven’t protected it. Trademarks, copyrights, and patents are absolutely necessary for the security of your business. If you don’t have them, anyone can take or “borrow” your intellectual property. You’ll have a hard time defending yourself against intellectual property theft if you don’t have any documentation that can specifically demonstrate that your ideas were stolen.
4. Keep a Record of Everything
Recordkeeping isn’t just for historians. You want accurate, up to date, and detailed information about every single thing that transpires within your business. These documents make it easier to handle taxes and avoid legal trouble. An employee can’t sue you for nonpayment if you can prove that the payments they received match the agreed upon amount for the work they provided. Detailed records can help show a potential lender that the amount of money you’re asking for is reasonable. Make note of everything.
5. Have a Plan to Deal with Sensitive Data
About half of businesses fold after a data disaster. Keep yourself from becoming a statistic. Start with a plan regarding what data will be stored and for how long. Create a clear policy for your customers to help them understand what data you’re collecting and what you do with it.
Make sure you are managing your data in a secure and efficient way, so that you can continue to serve your customers in the event that something goes awry. Also, in case they ask you to delete their data, make sure you are deleting it everywhere. Create a disaster response plan that will allow you to rebound from a data disaster as quickly as possible.
6. Properly Classify Employees
The law doesn’t play when it comes to the difference between an employee and an independent contractor. Hiring independent contractors makes things easier for tax and payroll purposes, but not all of the staff you need will qualify for the label. The guidelines are very specific. Make sure you aren’t misclassifying workers.
7. Keep a Lawyer Handy
Most small businesses believe they cannot afford to keep a lawyer on retainer. In reality, they can’t afford not to. Having a lawyer to consult before you make any big decisions will help you assure compliance throughout every phase of building and growing your business.
While leaving no stone unturned with the legal aspects of your business may extend the process of getting your startup off the ground, it’s well worth the wait. Don’t let legal trouble end your business before it begins.
