Whether the result of the recent recession or the desire by baby boomers to embark on a new professional path, the number of new business startups is growing fast. Here are 10 legal tips for entrepreneurs who are striking out on their own for the first time, -- born of experience -- from an Avvo lawyer who has advised many small businesses and who has also been the head of a business-to-business "dot com" of his own:
Choose the right form of entity. Decide if you’ll be operating your business as a sole proprietorship, partnership, LLC, C Corp, or S Corp. Sure, changes can be made downstream, but why not get it right the first time and avoid complications that could have unintended consequences? Each entity form has its own set of advantages and disadvantages when it comes to business structure and asset protection; consult with an experienced lawyer to determine the best fit for you. We all know that there are websites that will allow you to create an entity for very few dollars; but, the apparent “up front" savings is often an illusion, since what you truly should be seeking is not a downloadable “articles of incorporation" document you can edit and file, -- you should be seeking the wise counsel of someone who can come on board early, provide accurate advice early, then be with you – when you will inevitably need them – for the “long haul."
If you give advice, get insurance. Many professional who leave the corporate world to start their own consulting business may want to look into liability insurance to protect themselves from lawsuits based on claims of faulty advice.
Create good contracts. Getting paid is often a problem for new startups; be sure to get agreements in writing and enforcements for failure to pay. It is sad to see a client after a relationship has gone sour, and have them tell you that they saw no reason to have a well-drafted written agreement, because they could not imagine that the relationship would end poorly. The time to have clarity is at the beginning of a business relationship, not at the end. Saving a few dollars now could breed a disaster later.
If you have a partner, get a buy-sell agreement. A buy-sell agreement will spell out what happens in case a partner wants to exit or dies unexpectedly. Again, the time to have clarity is now, not later. What if your business partner commits a felony? What if he or she goes into a coma? A buy-sell agreement spells out how you and they will cope with the unexpected. It can also be a marvelous way to protect the interests of a spouse, insuring that if you are unable to continue, they will be fairly compensated and the business will be able to survive and prosper.
Know employment laws. Many startups hire contractors to get up and running quickly; however, you need to be aware of the legal definition of a contractor versus an employee so you don’t run afoul of the IRS. That is just one example of an area of employment law that can spell disaster for any business. There are others. Knowing employment laws is a form of insurance. You can use Avvo's consulting agreement template as a sample.
Get the right documentation and keep it. Legal documentation for startups is important to have in place as the company grows, -- that includes customer contracts, confidentiality agreements, offer letters, and more.
Be aware of trademark issues. You don’t want to be in business for a few years and find out the name of your company or your best product is already trademarked by someone else. If a name is important to your company or product, protect it.
There are very important reasons to bring an experienced business lawyer into the picture early. Consider the value of “the voice of experience." It is something you should not see as a frill. The need for frugality should not be allowed to trump the need for common sense.