Legal Factors The Startup Entrepreneur Must Be Aware Of While Running Business

legal factors businessStarting a new business or a startup is a very crucial decision made by a person. It involves many strategies that can either make or break a business. Apart from having a good team, attractive product and service delivery system, good marketing and sales strategies and increased funds and social media recognition, there are chances of shutting down the business if they face some serious legal issues.

Agreement with co-founders

The most important thing that a business owner or an entrepreneur must do is to have a written agreement among the co-founders of the business because it avoids a lot of problems in the future. It should contain all the information, like the percentage of shares owned by each founders of the business, responsibilities and roles of each founders, whether the ownership depends on the continuous participation in the business. It should also include the details of how the sales of a business are decided, vision and mission of the business, contribution of each founder in the business and if a co-founder moves from the business, are there possibilities for the other founders to purchase that share and the amount at which they can buy the share. These are some of the required aspects that the agreement should state which can avoid future confusion in the business.

Form of Business

The entrepreneurs and business owners must decide on the form of operating their business because it involves many legal and regulatory factors which must be dealt with the consultation of the legal advisors.

There are different legal forms available for a startup business,

Sole proprietorship: Apart from the legal permission from the local and state business permit, this form does not require any filing of legal documents, fees payments and other paperwork. But the main drawback of this form is that it is owned by a single person, therefore if the business requires any extra investors it is not possible in this form. And it does not offer any security for the sole proprietor since the liabilities of the business are the liabilities of the business owner. If the proprietor of the business dies, the business is terminated.

General and Limited Partnership: This legal form involves more than one business owner. According to this form, the founders of the business agree to the partnership and frame the rules for running the business. And the Limited partnership restricts the personal liability of the partners for paying the debts of the business depending on the investments made by each founder or partner of the business.

Corporations: Under this form, the entities or corporations under the state law. And the Articles of incorporation must be filed with the state regulation to establish the business.

Limited Liability Company: This form is between the corporation and the partnership and the member of this form has income benefits like the partnership and operational flexibility, but they are also intended to limited liability. Even though it seems to be like the limited partnership, it has statutory and legal difference.

The Limited partnership, corporation and the LLC operate under the state regulations and by filing the legal documentations. Due to the accounting issues and the taxations, the cost of running these entities are higher than that of the sole proprietorship and partnership. However all forms of entities provide advantages for the founders, including the tax savings, liability protections and other benefits that are offered only in the LLC and corporation. There are options for the partnership and the sole proprietorship to move to the Limited Liability Company and corporation, but the conversion cost is significant.

Proper contract

Any company that operates business must have a standard contract form when they make business dealings with the clients or customers. To create a standard contract, the business owners can review the contract samples of other companies in the industry. If the drafting of the contract form is done by an experienced business attorney, the standard of the form will meet the business standards. The alignment, font size and the typeface of the document must be in the standard from with all the specifications like the amount, due payment and the interest and penalties must be mentioned clearly in the contract to avoid confusion. The inclusion of the limitations of the liability and the resolution of the disputes that occur will add extra standard to the contract.

Security law

The sale of stock, limited partnership, LLC interest to the investors and the founders and the limited partnership interest are subject to the state and federal securities law. These securities must comply with certain filings, disclosures and other requirements. Those who fail to comply by these requirements have to pay penalties for the business owners. And the business requires the startup business to re-purchase all the shares at the issuing price even if they have lost their revenues. To avoid these kinds of legal issues, the business owner must appoint an experienced lawyer to document the sales of shares in accordance to the regulations and laws.

Employment documentation

All the businesses must maintain an employment document that is signed by the employees of the business. If a business does not maintain a proper documentation, they are liable to more problems. Employment documentation must include the stock incentive plan, stock option document, Option agreement and notice of stock option grant. It should also include the ‘at will’ letter, employee handbook, IRS form, confidential information and invention assignment agreement and benefit forms like the healthcare insurance forms.

Intellectual property protection

Obtaining intellectual property protection for the service or technology or product will protect them from the others in the commerce. It is the responsibility of the business owner and the investor to protect the value of the service or process to maintain the goodwill of the customers and clients and to avoid the infringement. Some of the intellectual protection measures are the Trademarks, copyrights, service marks, patents, trade secrets, confidentiality and assignment agreement for the employees, confidentiality agreements.

Tax issues

If the business does not follow the proper tax rules and regulations, they have to face massive penalties, lawsuits, criminal cases and the possibility of imprisonment. And there are few tax issues faced by the business owners while starting a business, like choosing the right form of operating the business like an LLC or corporation, the sales and payroll tax, qualified stock and business stock and stock option issues. Consulting a tax lawyer or an accountant will help with the tax issues faced by the business.

Terms and Policy agreements for website

The Use Agreement is the terms and conditions imposed for the people using the business website. And the Privacy policy is a legal document on the business site that informs what the company will do with the information collected from the users and consumers who are accessing the business website. The Use agreement includes the usage and limitation of the website, warranty disclaimers, rights of refunds the intellectual property rights, etc. And the privacy policy covers the information on the website, details shared with the third party, security information and confidentiality of the user information collected on the site, etc. Any business or company must not copy the privacy policy of another business because the privacy policies are created for a legitimate reason in favor of the particular business and business owner.

Legal counsel

To save the expense of the business, the business owners often appoint incompetent lawyers or legal advisors. But instead, appointing an experienced legal counsel will help the business and the owners to avoid the legal issues. The lawyers must be aware of all the legal areas like the Employment law, tax law, franchise law, corporation and commercial law, securities law, intellectual property law, real estate law and contract law.

(Disclaimer: This is a guest post submitted on Techstory by the mentioned authors.All the contents and images in the article have been provided to Techstory by the authors of the article. Techstory is not responsible or liable for any content in this article.)

Image Source:

About The Author:

HeadshotAnand Rajendran is a freelance writer living in Chennai, India. His interest in personal finance and budgeting began when he was earning an MFA in theater, living in one of the most expensive cities in the country (Chennai, TN) on a student’s budget. Today, he writes for a number of websites and keeps up his own Tax Consultancy Services named Uptra Consultancy Services