It must be exciting for young entrepreneurs to finally see their startup ideas materialize in the real world. When the product or service seems innovative, the focus is directed toward ensuring that it catches on.

Everything else is pushed to the periphery, but in doing so, startup founders could place themselves at risk of legal problems that could make expansion or even survival impossible, if not exceedingly difficult.

If you want to make the most of the market as a newcomer, it matters to know what legal consequences you could face if you make the wrong business decisions. Considering how much blood, sweat, and tears you’ve shed to put your startup on the map, it only takes a lawsuit or a violation to put your goals on hold. Here’s how you can ensure the legitimacy of your startup and allow it to stay for the long haul!

1. Know your legal obligations

People often think that startup founders are nothing like the typical CEO because they tend to be more creative, so much so that they won’t hesitate to go beyond conventional business practices and traditions and follow their formulas for success. In a way, that’s true if we look at the people behind Spotify and Facebook. Then again, these same individuals only prove what problems may occur when legal responsibilities are thrown out the window.

The fact that you founded your startup doesn’t absolve you of any liability if your business runs into legal trouble. It pays to be educated, especially when it comes to the obligations, limits, and duties of the position you hold. You have ample time to learn not just about tax laws, but also about copyright laws, labor laws, and other aspects of corporate law. By learning about your responsibilities, you will be able to make well-informed decisions as you go through the other steps of structuring your startup.

2. Select the right legal structure

Building a startup is not just a matter of securing funding, hiring people, and developing a flagship product or service. Part of the long list of responsibilities you need to assume as a founder is to choose a proper legal structure.

Apart from determining how your startup will be taxed, a legal structure protects your assets if ever the startup goes bust and establishes clear terms on who owns the business, what roles exist within the organization, and how corporate decision-making is practiced.

With the right legal structure, you can open up your startup to more funding opportunities as it seeks to expand. Most startups begin as sole proprietorships where founders are the sole owners and managers. From there, you may reorganize your business into a limited liability company or partnership, depending on the kind of trajectory you want your business to follow. Partnerships are more straightforward, but being a limited company grants you flexibility to seek out third-party financing.

3. Always ask for legal advice

Choosing a proper legal structure alone can be overwhelming and there are other legal areas you will need to address to get your startup fully recognized as a business entity. As you recruit more people into your team and acquire more office space, you must delegate the more complicated legal aspects to a specialized team.

If you decide to turn your startup into a limited company, contact a service that offers help starting a business as an LLC. This entity will help you from drafting and filing the articles of incorporation and other documents.

Not only that, you may have to decide on getting an attorney on retainer or setting up an in-house legal team that can handle other functions and deal with legal crises that may catch you off guard. Don’t settle for attorneys with a limited track record. Go for legal specialists who have nurtured an impressive reputation among the biggest names in the startup industry.

4. Never overlook intellectual property laws

One fatal mistake you will make as a startup founder is to unknowingly infringe on another entity’s intellectual property. When another business notices that you’re using its copyright without consent, you could spend around $100,000 for your legal defense. That doesn’t even cover the penalties and settlement amount the court may impose on your startup. You may also be unaware of what patents and trademarks exist in the startup arena that make intellectual property law a delicate ground to walk on.

You can avoid running afoul of another company’s intellectual property rights by simply coming up with original ideas and concepts. You should also avoid explicitly using existing images, text, and other content without notifying and asking for well-documented permission from the original owner or source.

You can keep yourself out of a legal pitfall when you get your legal attorney to conduct a prior art search and deal with possible copyright violations. It’s also important to secure your startup’s intellectual property by getting your legal team to help you register your copyright and protect your startup’s image from being used by others.

5. Take good care of your employees

Another major issue you wouldn’t want your startup to face is the violation of local and national labor laws. While it falls within your discretion as the founder and owner of the startup to recruit the best people and announce lay-offs as a cost-cutting measure, you still need to make sure such decisions conform to existing regulations.

For one, discriminatory practices in your recruitment process will put your startup in the hot seat for violating fair employment laws. Turning down applicants based on their sex and religion as well as offering wages below industry standards will not only make it harder for you to recruit the best talents, but also stain your reputation as an employer.

The same is true along the lines of ensuring workplace safety and providing employees with government-mandated benefits such as 401(k) accounts and workers’ compensation programs. With this in mind, take care of your employees so they can take better care of your startup as it grows. 

6. Have all your documents in order

The proper archiving of legal documents might seem like extra work for startup founders who are never used to administrative functions, but it plays a crucial role when your business faces a legal hurdle. You may be obligated by a court to produce such documents to aid in investigations and judgments that may favor your startup granted you have everything in place.

Make sure to save copies of contracts, agreements, and other documents involving other parties. It’s also important to do a proper accounting of your startup’s earnings, tax liabilities, and operational costs. Save receipts and financial statements which may come in handy not just in filing a tax dispute, but also in dealing with alleged violations of securities fraud.

Endnote

The legal side of starting and managing a startup might come across as boring to founders, but paying attention to it will help them avoid costly and reputation-damaging problems. Take these tips to heart and keep your brainchild out of legal trouble!