We might not like it, but obeying the law is a must – it gives our world greatly needed structure. If you fail to acknowledge the legal realities of our world, your life as an entrepreneur can easily turn into a nightmare. Regardless of the type of business you’re running, here are four most common legal mistakes other businesses make regularly that you can learn from.
1. Missing Structure
Now, while forming a corporate entity may seem as a redundant complication, you can rest assured that it isn’t. Choosing your startup’s structure isn’t something to be taken lightly, nor should it be done just because the law dictates so. These are several types of entities to choose from:
- Sole Proprietorship – Although it doesn’t require legal documentation, fees or filings, there are many downsides to this structure. For example, sole proprietorship, quite logically, has only one owner, which means it can’t get additional capital if it’s required from another investor. The second downside to this entity is outlined in the fact that a sole proprietorship provides no protection for the founder against creditors.
- General Partnership – in cases when there are multiple founders, the startup owners often choose this entity. Should the partners not agree to “set the rules” among the founders, the rules are supplied by state laws. The income is taxed directly to the partners, on a pro rata basis.
- C Corporation – C corporations are formed under the state law.
- S corporation – Although the S corporations are also formed under the state law, they have favorable tax treatment.
- Limited Partnership – Formed under the state law, limited partnerships are good for holding investment real estate and are preferred by private equity firms and hedge funds.
- LLC – LLCs are a corporation and limited partnership hybrid.
2. Name Infringement
Many budding startups have failed on account of unknowingly standing on someone’s IP toes. So, you’ve finally come up with a perfect name for your business; you feel pretty keen on paying someone to come up with your logo and are already picturing a successful business a couple of years down the road. Well, before you invest blood, sweat, tears and money, make sure that your lawyer conducts enough research, just to make sure your idea was completely original, otherwise, you’re risking a lawsuit and wasted effort.
3. Injury Coverage
Regardless of the type of business you’re in, people have a tendency to get hurt while at work and, more often than not, the workers are the ones who get full compensation. For this reason, having a work injury lawyer on retainer is a very smart move – you’ll need all the legal help you can get.
4. Not Having an Exit Strategy
This is especially risky if you’re forming a partnership with a good friend or a relative. You are 100% sure they would never stab you in the back – and they don’t even have to – failures simply happen, no matter how hard you try. This is why having an exit strategy is so important – knowing how and when you or your partner(s) can sell your stakes is a smart way to go.
These four most common legal mistakes are easily overlooked, but can even more easily bring your entire business down. Keep in mind that startups are quite fragile and when starting a business of your own, the wisest tactics would include learning from other people’s mistakes.