September 26, 2021 Last updated September 25th, 2021 249 Reads share

8 Common Legal Problems Every Startup Should Avoid

Image Credit:

There are several reasons people could want to start their own businesses. For instance, some may want to build their investments, while others just want to earn a living after losing their formal employment. Whichever the case, starting your own business can give you the freedom to become your own boss and control your destiny.  

However, while starting and running your own business can be an exciting venture, several challenges can hinder you from succeeding. Some of these barriers are legal issues.  

So, if you want to get your enterprise off the ground, and stay ahead of the competition, here are some legal problems you must avoid: 

1. Incorrect Business Structure 

One of the major legal challenges facing most new business owners is what form or structure of a company to launch. There are different types of startup business structures, and each has its implications in terms of tax liabilities, funding opportunities, personal liabilities, and much more. Some of the major business structures you can launch include a sole proprietorship, partnership, limited liability companies and corporations. 

Though you can change your business structure as your startup grows, you can avoid many future legal issues by choosing the right business structure at the beginning. For more information about business structures and their legal implications, you can consult an experienced and reputable Miami business lawyer if your business is in the area. 

2. Lack Of Certifications and Operating Licenses 

Before any business opens its doors, the Companies Act requires it to have the right operational licenses and permits. So, before you launch your startup business, ensure you’ve got all the certifications and licenses needed by the law.  

Operating a business without the required licenses can have very serious legal implications for your firm in the future. For instance, it can attract huge fines and penalties and can affect your future profitability. So, it’d be a good idea to consult experts to advise you about all the legal requirements you need to meet before launching your business. 

3. Absence Of Founder’s Agreement 

Conflicts are one of the major issues that can affect the growth of your startup business. For that reason, you need to have a binding agreement among business founders and other shareholders. So, before you launch your startup, it’s a good idea to draft a founders agreement explaining the roles and responsibilities of each founder member and other stakeholders.  

Other information to be included in this agreement include each founder’s equity contribution and company dividend policy. A founder’s agreement can act as a reference in case of a dispute.  

4. Ignorance Of Applicable Taxation Laws 

Compliance with taxation laws is a must for any business, and startups aren’t exempted. Failure to submit and file the relevant tax information can attract hefty penalties. So, when starting your business, you must first understand your tax liabilities towards the local and the central government. 

Also, you must be aware of the documentation you must maintain after submitting and filing for your taxes. Note that different tax rates apply to different business structures. Therefore, you must choose your startup structure wisely to avoid paying high taxes to the government.  

5. Improper Employee Contracts 

Lack of proper employee agreements is another major challenge facing startups in the modern business world. So, whether you employ your workers on a permanent or casual basis, you must put it in writing. In addition, allow employees to read and understand all the employment terms and conditions, compensations, and other employment information before they can sign the agreement.  

Failure to maintain a formal employment agreement can cause many troubles for your startups. For that reason, you can work with an expert to help draft employment contracts and formally legalize them. When doing this, you need to be guided by labor laws.  

6. Failure To Protect Intellectual Property Assets 

Another legal challenge facing startups is improper protection of intellectual property assets.  During the initial stages of startups, they might not have intellectual asset properties.  

However, they can create such assets as they grow and expand. That’s is why any startup should think about protecting their intellectual assets from the beginning. Some common intellectual properties include algorithms, website codes, logos, research findings, product designs, and much more.  

Protecting your intellectual property assets helps shield their ownerships from your competitors. In other words, it ensures you legally own them, and no one else could claim their ownership.  

7. Non-Compliance With Security Laws 

Non-compliance with security laws is another big legal issue that can harm your startup business in the future. Complying with security rules and regulations is a legal requirement for any business.  

When operating your business, you’ll come into contact with customers’ vital information. Security laws require you not to disclose such information to third parties. For that reason, you need to follow all the rules regarding customers’ and other stakeholders’ data security.  

8. Improper Documentation When Selling Shares 

Some startups owners may decide to sell part of their ownership in order to raise funds. When they sell shares, they’re required to document these transactions to help formalize the agreement fully. However, most startups fail to adhere to this regulation. They, therefore, end up finding themselves on the wrong side of the law.  

You can avoid this by properly documenting your transitions when selling some shares of your firm. For that reason, you need to read and understand all rules governing the sale of shares in your country or consult an expert to guide you.  

Takeaway 

When starting a business, most people focus on growing the number of customers and fail to comply with the legal rules governing their business operations. For that reason, they end up spending a lot of money after facing legal lawsuits. That’s why every startup needs to understand all the potential legal challenges and avoid them.  

In summary, some of the legal issues that startup businesses can face include failure to launch the correct business structure, operating without proper licenses, absentees of founders and employees’ agreements, and much more. Avoiding these legal issues can help to improve your business efficiency, enhance public relations, promote workers engagement and retention, and more importantly, allow you to maximize your profits.

Gabriel Simmons

Gabriel Simmons

Read Full Bio