Updated: Oct 1, 2020
New entrepreneurs often make legal mistakes without realizing. These legal mistakes can not only harm the business’s potential success, but it can also impact your ability to implement your exit strategy in the future. These are a few of the top legal mistakes to avoid as a new entrepreneur.
The first is using the wrong entity type for your business. Every business entity type has its advantages and disadvantages. The business type used depends on the current position of the company, but also its future needs. The business types vary mainly in liability, taxation, and the required record keeping.
The second common legal mistake is not to implement a partnership agreement. When starting a business together, the hope is that everything goes smoothly and that the use of the agreement will ultimately be unnecessary. You wouldn’t be going into business with that person if you didn’t trust them, right? Unfortunately, disputes frequently arise in decisions for the company. When that happens, you need to have an agreement in place that dictates what will happen upon a disagreement amongst the partners.
The next common legal mistake made by entrepreneurs is using the wrong type of equity arrangement. Whether this be using the incorrect fundraising technique or giving an unproportionate amount of equity, the small, technical details matter and ultimately affect ownership of the company.
Another common legal mistake made by entrepreneurs is that they do not protect their intellectual property. The intellectual property of the company is considered an asset and needs to be protected. This type of protection can often include patents, trademarks, and copyrights. The different regulatory bodies that govern these protections have requirements on what can be protected and how to apply for them.
Lastly, a common legal mistake made by entrepreneurs is not using non-disclosure agreements before pitching their ideas. While the decision to have a potential investor or partner sign a non-disclosure agreement is a tactical one, sometimes it is necessary in order to protect the future viability of the company. The last thing any business needs is to have their new idea, product, or service taken and implemented by a competitor.
If an entrepreneur can avoid these mistakes, they will set their company up for a better chance of success. As a law firm, these are just some of the areas that we are able to help guide our clients. If you have made one of these decisions or are wanting to avoid a mistake, make sure you reach out to us so we can help guide your company.