As a business attorney, I have witnessed several common legal mistakes made by startups. Here are four crucial tips to help you protect your startup from common legal mistakes.
1. Have Quality Business Contracts in Place
Many startups rely heavily on do-it-yourself boilerplate contracts when executing business transactions. Though boilerplate contracts are easily accessible online for a minimal fee, often they do not protect your interests. It is best to have a business law attorney draft and review agreements to protect your business interest and prevent lawsuits from arising.
2. Select the Appropriate Business Entity Type
One of the first decisions startup business owners must make is to decide which type of business entity they should operate. The top three common business entities are sole proprietorships, limited liability companies (LLC), and corporations. Additionally, depending on the state, additional business entities may be available.
The business entity you choose will depend on the type of legal protection best suited for your business enterprise. Some entities provide personal liability protection in addition to tax savings.
You should consult an attorney to find out which business entity is appropriate for your business. Corporations, LLC, and some partnerships are formed by filing legal documents with select state agencies. For example, in California, Article of Incorporation must be filed with the Secretary of State.
3. Negotiate Business Prices
It is not uncommon for most startups to pay sticker prices for goods and services to support their business operations. I recommend you negotiate prices with companies instead of paying full price. For example, if you are ordering office supplies in bulk, in addition to soliciting multiple sources for quotes, try and negotiate a discount prior to agreeing on a final price.
4. Have Partnership Agreements in Place
You should never start a business with a friend, colleague, or family member without having a partnership agreement in place. This agreement can protect the business and limit your exposure to liability. Make sure your partnership agreement clearly defines each person’s role within the company, interest, and rights. For example, your partnership agreement should clearly state ownership interests, the roles and responsibilities of founders, partner salaries, who makes day-to-day business operation decisions, and under what circumstances a partner can exit the venture.
Certain states have strict restrictions regarding the formation of joint relationships. You should consult with a business attorney for legal advice.
Do not try to be penny wise and pound foolish. Hire a competent business attorney to help you navigate the legal aspects of running your startup to prevent common legal mistakes from arising.
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