Startup Companies: Avoiding Key Legal Mistakes Checklist

Set Your Business Up For Success

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Now that you’ve formed your company and are open for business, there are some more legal items you’ll want to address so you don’t mistakenly run your business into the ground before it takes flight. This blog will discuss these key issues and should serve as a checklist of items to cover when starting your business.

Key Takeaways

  • Choosing the right entity is your company’s first make-or-break proposition
  • Shoring up roles of the principals and founders, as well as relationships with third-parties will put you on the path to success
  • Protecting branding and intellectual property, along with creating and maintaining robust social media and digital marketing policies/procedures is a must

Forming your business and addressing logistical issues that will allow your you to legally operate are big steps. But, many small businesses fail shortly thereafter for failure to address commercial or business issues from a legal perspective. reasons. Involving counsel at the outset of formation through operations can stave off early failure. This blog post will provide a checklist of some of the most common legal issues that get overlooked by startup companies and suggest possible resolutions. For a complete checklist of common mistakes businesses make, contact us.

SELECT THE APPROPRIATE TYPE OF LEGAL ENTITY AT THE OUTSET

We’ve already discussed that choosing the proper legal entity for your business is a complex process. Selecting the appropriate entity from day one will allow you to avoid unnecessary headaches down the road like having to change your entity type. This decision should include considerations regarding which entity will best allow the business to operate and grow the way you imagine it, as well as liability, tax, and management considerations.

In choosing the appropriate legal entity, you should keep in mind some entity types commonly recommended for one type of business do not suit other types of businesses. For example, companies looking to issue equity compensation or expect to receive venture capital funding are best formed as C-Corporations, as opposed to limited liability companies and limited partnerships. For a complete comparison between entities, contact us.

Also, one of the most important reasons you’ll form a legal entity is to avoid personal liability. You’ll want to make sure that your company is formed to avoid exposing founders to personal liability and take advantage of limited liability where possible. Once the business is formed, you’ll also need to make sure that all business activities are conducted through the legal entity, and not by an individual of other party because this will unnecessarily expose the company and its founders.

Since maintaining corporate status after formation involves careful attention to reporting and filing requirements, as well as certain requirements under state law, including annual meetings and proper record-keeping, you’ll want to involve counsel so you can focus on your business. For more information on corporate maintenance, contact us.

CLEARLY AGREE ON AND PROPERLY DOCUMENT PRINCIPAL ROLES AND RESPONSIBILITIES

Another important component of starting a business is making sure your contractual relationships are in order. This mean you’ll want to formalize relationships between company principals. This is important even if you’re company consists of family and friends. By doing this, you’ll avoid uncertainty since each person’s role and responsibilities are clear.

Formalizing your relationships will also include specifying how key decisions will be made and who will make them. Decision making processes should also be outlined and in the likely event there is some disagreement amongst the principals, a mechanism for dispute resolution between those individuals can be made clear.

Many of these items, along with ownership percentages among the principals and any other owners of the company can be handled in corporation by-laws or an operating agreement of an LLC, as well as a stockholders agreement. While these documents will have already been drafted, it’s important the principals recognize this formality at this stage of the game, rather than just set the documents in a binder somewhere in a cabinet because this will legitimize the business.

PROPERLY DOCUMENT THIRD-PARTY RELATIONSHIPS

If you’re going to be working with third-parties in operating your business, then we recommend properly documenting the relationships you’ll have with these parties to protect your interests and reduce your exposure to risk.

Even if you’re operating a small, local-only business it’s important that you don’t merely rely on oral arrangements with your clientele, and any other third-parties like suppliers, marketing advisors, as well as your employees. It’s even important to document relationships with friends and family or any other pre-existing business contacts.

If you’re going to be working with certain parties on a recurring basis, then you’ll likely want to have some sort of master agreement that is agreed to and accepted, and then short-form agreements that will allow each transaction to proceed effectiely and efficiently. Any questions regarding particulars should be governed by both the master agreement and short-form agreements, but setting things up like this will allow you to focus on your business and not get wound up in a legal web every time someone wants to purchase good or services.

In the event that your company has employees, you’ll want to use appropriate restrictive covenants in employee contracts to protect the company's goodwill, customer relationships, and proprietary information. Restrictive covenants can also be stand-alone agreements.

 
Calling an employee an “independent contractor” will not relieve you of your obligations as an employer to provide certain minimums to those working with you. Just ask Uber.
— The Schlau|Rogers Team

Also keep in mind that having employees raises many legal issues like state and federal wage and hour laws, anti-discrimination laws, classifying independent contractors and unpaid interns properly, payroll and benefits administration, employment agreements, workplace policies, and insurance to name a few. Since this is the case, it’s extremely important to seek the advice of an attorney if you’re thinking of having third-parties work for you.

As an aside, merely labeling a prospective employee as an “independent contractor” will not relieve you of your obligations as an employer to provide certain minimums to those working with you. Just ask Uber.

Again, it’s important to seek the advice of an attorney if you’re thinking of having employees. Proper practice regarding both employees and independent contractors is beyond the scope of this blog post, but if you’d like guidance in this area or with other third-party relationships, contact us; we’re happy to help.

CLEAR AND PROTECT YOUR BRAND AND INTELLECTUAL PROPERTY

Another key component of ensuring your business is adequately protected, is making sure that any intellectual property rights you might have yours and yours alone. This means you’ll want to protect your brand which could include your business name, business logo, as well as your website or domain name.

The first step in tackling this issue is determining the type of protection you’ll need. For example, early-stage business activities could require you to safeguard confidential business information and trade secrets by using confidentiality and nondisclosure agreements, register copyrights and use copyright notices, clear and register trademarks and use appropriate notices, secure rights protections for any company proprietary software, and/or take steps to protect the company's valuable data and databases.

Once you’ve determined the types of protections needed, you’ll want to make sure the rights are available. If you’re after a trademark, this means you’ll want to perform a trademark search. Once the names are confirmed to be available, you’ll need to acquire the rights to the mark(s) by filing for protection in the areas your business will operate. For further assistance with this, contact us and we’ll be happy to help.

Once you’ve protected your brand, you should then be able to use it whenever and wherever you’re conducting business. Acquiring the rights also means that you should be able to prevent other people or businesses from using images, names, etc. that are associated with your brand and are protected.

Keep in mind that trademark rights are generally given on a first-to-file basis so you’ll want to do this as soon as practicable. To take obtain rights before actually using the mark in business, you can take advantage of the intent-to-use registration. You can find information at the United States Patent and Trademark Office and the California Trademarks and Services Marks page of the California Secretary of State.

Also note that it’s possible you may want to seek trade secret or patent protection for the company's inventions depending on the type of business. For more information about the different kinds of protection and guidance, contact us.

CREATE A POLICY FOR SOCIAL MEDIA, DATA COLLECTION, AND OTHER DIGITAL ACTIVITIES

Social media is playing an more and more important role in our lives. Things are no different in the business world. Chances are you’re reading this blog from a social media news feed. Whether we like it or not, social media is here to stay.

But don’t assume that because of the casual nature of social media and other online and mobile applications that these activities cannot do great harm to your business. To avoid falling in the social media trap, we recommend your business adopt a company-wide social media policy. This will allow you to safely leverage the vast networking capabilities of social media and make sure principals and employees alike are able to stay on the same page.

Your policy should instruct those that will be active on social media in a company capacity on how to comply with your company policy, and stay on brand. If you think that you’ll be very active on social media and this will be a primary driver of business, you may want to also make sure that your policy includes a process for adequately clearing content posted, and clearing content that might be appropriated from third-parties because this will avoid unnecessary headaches down the road. Another component of your policy should instruct principals and employees alike to consult legal counsel before posting or commenting about material aspects of the business.

You should also have a privacy policy that is included on your website, and become familiar with laws related to any targeted advertising, endorsements, contests, and promotions. Keep in mind that privacy and data security laws can change so you’ll need to stay up to date on any law related to he collection, use, security, transfer, and disposal of the personal information of employees and customers that is collected and maintained by or for the company. You can find our privacy policy here.

Your company website should also include a terms of use agreement that any user of of your site agrees to once they browse the content contained therein. This terms of use agreement should be tailored to your specific business. You can find our terms of use agreement here.

If you’re going to be conducting business online, you’ll also have to consider e-commerce rule and regulations related to interstate commerce, business and tax payment mechanisms, privacy, sales tax, and data security.

If you’d like guidance and assistance with a comprehensive policy related to social media, data collection and/or privacy policies, business-specific terms of use agreements, social media training for principals and employees and e-commerce issues, or any of the items mentioned above, schedule a strategy session today; we're happy to help.

Matthew Schlau is a co-founding principal of Schlau|Rogers and an estate and business planning lawyer practicing in Orange, San Diego, Los Angeles and Riverside counties. He is a husband, father, blogger, crossfitter, and really good at helping people achieve their goals.

At Schlau|Rogers, we do more than just estate and business planning, probate and trust administration. Our objective is to provide individually-tailored plans that allow you the opportunity to reach your goals, all while minimizing headaches and risk, and maximizing peace of mind.

On our blog, you'll find useful information about estate and business planning, probate and trust administration, as well as some tidbits on personal finance, taxes, and anything else we think will help minimize headaches, worry and risk, all while maximizing peace of mind.

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Disclaimer: This blog is a resource for educational and informational purposes only and should not take the place of hiring an attorney. Using this blog does not create an Attorney-Client relationship between you and Schlau|Rogers. Individually-tailored legal advice is not provided within this blog. Instead, this blog is a resource designed to make you aware of various legal issues. Your use of this resource is subject to our Terms and Conditions, which you can read here. If you would like to hire an attorney, you can get in touch with us at (949) 873-0662 or request a strategy session.