Businesses can be plagued with overlooked legal issues. Details and nuances that don’t seem important early on can be the difference between success and failure. Many typical mistakes can be prevented with the right foresight and planning. Below are seven mistakes entrepreneurs make.
1. Choosing the Wrong Corporate Structure
If you launch your business and don’t incorporate, you will be personally responsible for all the business’s liabilities including loans, litigation, etc. If you choose to incorporate, it is vital to understand the difference between sole proprietorships, C & S corps, LLCs, partnerships and professional organizations. If you are a professional under Title 8 of the Education Law, you must incorporate as your type of Professional Corporation by law. If you are a foreign corporation whose owners are not located in the US, then you are not able to file as an LLC. As you can see, there are many considerations when incorporating which can affect the future of your business.
2. Not Having a Partnership, Shareholder or Member Agreement
One of the biggest mistakes entrepreneurs make is not having an agreement with their partners or investors addressing how the company will operate. Many entrepreneurs feel they don’t need to have everything in writing because they’re friends, family, or share a common vision. Unfortunately and inevitably, the day will come when you and the other members of the company will disagree. One person may want to take out more money on a loan, another may want to sell the business. To avoid conflict and costly litigation in the future, it’s imperative that entrepreneurs agree, in writing, the responsibilities of each party, how disagreements are handled, how major decisions are made, what happens in death or disability, and how to dissolve the company.
3. Telling the World about Their Ideas Without Any Protection
Entrepreneurs are always excited to discuss their great idea with friends, family, investors, and vendors. However, revealing your idea early on without any protection can leave you exposed to theft. Whenever discussing your business with vendors or investors, ensure that you have a non-disclosure agreement or NDA. This agreement legally swears the third party to secrecy. Should they reveal your secrets, they will face the legal consequences. You should also consider filing a trademark, which will protect others from stealing your name and business identity. A trademark helps to protect your name or logo by giving you a cause of action against anyone attempting to confuse and steal your customers by pretending to be you. For inventions and unique creations, you should consider filing for a patent.
4. DIY Drafting
Many businesses fall into the mistake of do-it-yourself agreement drafting. This might seem like a good cost-saving measure for your company, but as it grows ambiguities arise, which then lead to costly litigation or redrafting. Companies can save themselves a lot of grief by seeking help from a professional for contract drafting. An attorney can identify potential issues and conflicts that can arise in the future, allowing them to agree upon a conflict resolution approach without any anger or resentment.
5. Trusting Distributors, Developers, or Other Third-Party Vendors to Draft and Structure Agreements
It’s an old rule of contract drafting; whoever drafts the agreement has the power. Many companies typically feel that they don’t have any bargaining power when entering into agreements with existing or long-standing companies. Even worse, many entrepreneurs for one reason or another think they’re vendors have their best interests in mind. That couldn’t be further from the truth. Most businesses are only interested in their bottom line, not yours. An exuberant amount of failed companies fell victim to one-sided agreements that favored the vendors and crushed the company. The best way to avoid this problem is to seek the help of a professional that will review and even negotiate on your contracts for you.
6. Failure to observe Securities Laws
Many entrepreneurs don’t realize that they may be breaking state and security laws. Whenever you issue ownership interest in your company to investors, be they family or venture capitalists, you are creating a security. A security is basically an issuance of ownership interest in a company in exchange for capital without having a working role in the organization. There are many state and federal laws that require securities to be registered prior to issuance. It is essential to speak to a professional that not only understands the legal requirements, but the exceptions as well. The penalty for failing to properly register a security is rescission of the issuance, which means the company needs to pay back the entire investment at once.
7. Failure to Observe Applicable Regulations
Many industries are faced with state and federal laws and regulations, including healthcare, education, food production and distribution, pharmacy manufacture and distribution, and countless others. A big mistake entrepreneurs fall victim to is not knowing about and consequently not following the regulatory requirements of their industry. This can lead to disastrous results as companies can be shut down by government agencies after expending considerable capital to begin operations. Once again, entrepreneurs need to consult with a professional in their industry to navigate the different requirements their business must follow.