6 Legal Mistakes to Avoid When Starting a New Business
While every new entrepreneur takes into account the various legal complexities of setting up a new business, mistakes still happen, primarily because even the most seasoned businesspersons are not experts in the numerous legalities of modern-day business.
This quick guide lists six common but easily avoidable mistakes made frequently by new startups.
Not Ensuring Compliance with GDPR
GDPR, or General Data Protection Regulation, governs any use of data in your company. If your business is going to collect or process any type of data, your legal team must ensure that your processes are compliant with GDPR rules.
In addition, it is important to ensure that your data storage is compliant and won’t land you in a data privacy breach.
Proper privacy agreements and data-handling policies are integral to GDPR compliance. However, most executive teams in a startup lack the knowledge and expertise to draft foolproof privacy policies, which is why it is important to seek the help of a legal expert.
Not Protecting the Company’s Intellectual Property
Securing proper trademarks and patents is essential when starting a new business, in order to protect your intellectual property rights. In real life, however, many startups need to begin operations before a patent has been secured. In such a case, keeping a new invention a trade secret is crucial to avoid unfair use by a third party.
In such a situation, your business needs to have comprehensive non disclosure policies in place for your employees as well as the cofounders of your startup.
Not Complying with Local and State Tax Regulations
Depending on the type of business entity you have chosen, your business must comply with the applicable tax regulations.
Understanding taxation laws is crucial for any new business, as this will enable compliance with tax policies and also ensure that you receive the tax benefits that apply to your business.
Unfortunately, not all entrepreneurs take into account taxation nitty-gritty when starting a business, which can sometimes lead to unwanted legal complications and also mar a company’s reputation.
Not Investing in Quality Legal Counsel
Yes, hiring legal experts is an investment which, if done right, will protect your company against unwanted legal issues and expensive lawsuits.
In spite of knowing the importance having experienced business lawyers on board, many new companies shy away from hiring seasoned legal advisers to save money.
When you hire lawyers who do not have the expertise or experience needed to ensure legal compliance for your type of business, you put your company at risk of making costly legal mistakes in the form of incomplete or erroneous agreements and faulty policies.
Unless you have a co-founder who is well-versed in the complex legal aspects of running a business, it is best to hire an experienced attorney from a law firm that specializes in business law.
Check out this site for sound legal advice from experts with decades of rich experience in e-commerce, trademark, data breach, privacy, corporate law and more.
Not Having a Vesting Schedule for Shares Issued to Founders
Having a vesting schedule ensures loyalty among the co-founders, as it means that each member of the founding team will get to own their stocks over time.
In simpler words, vesting protects the founders that stay with the company and are committed to its success—if a co-founder leaves too early, vesting enables the company to repossess the shares issued to them, thus ensuring that the stocks stay within the company.
In addition, having a vesting period in place ensures that shareholders such as board members, co-founders, employees and vendors won’t be able to sell their equity for a predetermined number of years.
Creating a proper vesting structure requires expertise and a startup attorney can help you create one that best safeguards your and your company’s interests.
Not Choosing the Right Business Entity
Many startups end up registering a business entity that is not suited to their long-term business goals.
And changing the business entity a few years down the line is possible but time-consuming, costly and complicated. Consulting a seasoned startup attorney right from the start can help you avoid this common mistake.
You can choose to be an S-Corp, a partnership, a B-Corp or an LLC, but this decision should be made after careful consideration.
There are many useful guides about differences between LLC and S-Corp that will help you make your decision.
A Delaware C-Corporation is your best bet if you’re looking at raising money from VCs in the near future. To make the right decision, consult a qualified corporate attorney who can help you understand the intricacies of each model.
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