Common Mistakes Made by Start-ups

October 18, 2016

I enjoy assisting clients when they start new businesses. However, these same clients become surprised at the number of details they must address before they actually open their doors to the public or start to sell their products.

Many “start-ups” often spend a majority of their time developing concepts and ideas, hiring employees and they forget to address certain legal issues that will often raise roadblocks down the road when they start to market and establish their businesses after the start-up phase. This article will address a couple of the common mistakes made by new businesses.

One of the important decisions new businesses often forget is selecting the right type of entity. New business owners may choose from several entities, including sole proprietorship, partnership, LLC, different types of corporations. The owner’s choice will require reviewing legal risks and obtaining an understanding that the choice of entity may also impact the business’ tax liability and investment opportunities. For example, if an owner plans to seek money from venture capital firms or other similar types of investors, they may require that the business owner choose a C-Corporation and incorporate in the state of Delaware. Some new businesses may choose to start as an LLC or S-Corporation for certain tax reasons. Regardless of the choice of entity, a business owner must choose the most appropriate entity based on a variety of issues.

Another common start-up mistake occurs when multiple owners fail to establish clear ground rules about their relationship. Specifically, these ground rules include the percentages of ownership between the owners, distributions of income, liability, decision-making authority, and other responsibilities. I address these issues for my clients by establishing founding agreements between the owners. The terms of these agreements often depend not only on the type of business, but also the type of entity chosen by the owners. Some of the terms addressed in these agreements include how the owners will run the business, equity ownership, how to buy or sell ownership interests, liability for debts or other legal matters, and the incapacitation or death of a co-owner. Business owners who avoid having these difficult conversations at the start of a business will often see the amplification these issues in the future. By establishing a foundation agreement, business owners will likely save time, aggravation and additional legal fees.

Another issue business owners overlook is the protection of their intellectual property rights. This property right often occurs in companies that develop new products, inventions, and other technology innovations. Business owners must address and protect their intellectual property rights before establishing their business. Depending on the type of intellectual property at issue, business owners may obtain protection by obtaining patents, trademarks, or copyrights. There are also some legal agreements that may protect such rights. Co-owners of a business should consider requiring that the co-owners, employees, and third parties hired to work with the business assign their rights (by signing a written legal agreement) to any intellectual property that they create for use by the business.

This article has only addressed a couple of the legal issues new businesses encounter. New business owners may address many of these common issues by hiring a business attorney to guide them and effectively address these issues before they arise.

This publication, which may be considered advertising under the ethical rules of certain jurisdictions, should not be construed as legal advice or a legal opinion on any specific facts or circumstances by Pomeroy Law P.C. and its attorneys. This newsletter is intended for general information purposes only and you should consult an attorney concerning any specific legal questions you may have.