What are the Legal Mistakes faced by Startups

what are the legal mistakes faced by startups

What are the Legal Mistakes faced by Startups

Starting your own business is easy to handle until unless you have faced the legal mistakes. Entrepreneurs usually get busy in setting up the startup, developing the business plan, finding the target audience/ launching product or handling the process of hiring. In between focusing on all these goals, startups unintentionally get failed to make a strong legal foundation for them.

Initially, many companies avoid the legal compliance which later on turn into mistakes. For business startups in some sectors like health, education, or food, it becomes necessary to complete all the legal work to save time and money further.

Here is the list of common legal mistakes made by successful entrepreneurs to avoid the same so that you can run your own business smoothly.

1.    The absence of a proper agreement with Co-founders

Most of the startups are building on the combined efforts of two or more individual. If the roles and responsibilities of all co-founders were not delineated clearly, then it could cause closure.

Suggestions: Make an agreement between co-founders with a complete description of roles and responsibilities so that each one knows do’s and don’ts very well. It is necessary to sign a legal document to avoid any disputes. It will save time when one of the co-founders wants to exit the business. The agreement must also include how much profits, salaries or shares can dissolve among co-founders. Some Key Questions to mention in the agreement:

  1.  What percentage of the company gets by each founder?
  2.  What are the roles and responsibilities of the founders?
  3.  When a founder wants to leave, does the company or the other founder will have the ability to buy his/her shares?
  4.  How much time must be given to fulfill his commitment to achieving his responsibilities?
  5.  How are the key decisions of the business to be made?
  6.  Under what circumstance a founder are removed as an employee of the business?
  7.  How much money each founder must invest or contribute to the business?
  8.  What is the overall goal and vision for the business?




2.    Company Unregistered as a Corporate or LLP

Another mistake is not to register the company as a corporation or Liability Limited Company. As this is the foremost decision to make before starting your own business. The founders often wait to legalize the business and start without consulting a lawyer which led them to pay higher taxes or subject to liabilities.

Suggestions: One can register the business to avoid significant liabilities.

The type of business forms is available to startup business as:

  1.   Sole Proprietorship: Proprietorship or Sole Proprietorship is the business which owns by one person. It is a popular business because of its simplicity, nominal cost, and easy setup. Owner of the business is a responsible entity for all the debts, losses. The owner can register the business under his/her name or can use any fictitious name such as Look sure fashion store.
  2.  Limited Liability Partnership: LLP refers to Limited liability partnership firm. LLP is governed by Limited Liability Partnership Act 2008. Limited Liability partnership provides an advantage of limited liability to its owners. LLP has the dual advantage of a company as well as the partnership firm. It limits the liabilities of its partners. Simultaneously, its added advantage is that requires minimal maintenance. The directors of a private limited company have limited liability to creditors. In case of default, banks/creditors can only sell the company’s assets and not personal assets of directors.
  3.  Public Limited Company: This is quite popular and well known business structure. Corporate Customers, Vendors and Govt. Agencies prefer to deal with Public Limited Company instead of proprietorship or normal partnerships. Many times the business needs to borrow money and take high investment decisions. A Public Limited Company is the best option for entrepreneurs with larger investment requirements. To meet out the needs for the bigger amount of investments, the companies can call applications for equity shares
  4.  Private Limited Company: Private Limited Company Registration is an option through which you can give your startup a legal identity. In fact, it is the most popular and transparent mode of registration of business set up in our country. We at Startup Launcher help the new upcoming startups and existing Proprietorship/ Partnership firms in forming the Private Limited Company. There is a lot of documentation required during the process of forming the Private Limited Company. Furthermore, there is a set procedure for the formulation of the company.



3.   Less Standardized Contract Form in favor of the Company.


Every business must have a solid contract form or agreement form when dealing with customers or clients.  But, the fact is, there’s no standard contract form due to one or other side can tailor the complete document.  A proper contract is key for long-term customer relationship.

Suggestions: First, take help from people who are dealing with the same target audience that you are. While making a contract form consult with your business lawyer or hire an expert. Draft a contract that can be easily understood by the clients or customer. Make sure that form includes pricing of product/services, the time of completing payment, and what would be the penalties if payment isn’t made.


4.     No proper security laws while issuing stocks to angels/family/friends.


A startup or business needs a lot of funding to grow potentially in the market. So entrepreneurs seek investment from angel investors, family, friends while they also issue stocks to the investor. If the stock were issued without any disclosure under security laws, then there would lead it to serious legal issues at a later stage. Failure to complete this legal compliance will cause financial penalties to the founders and Startup Company.


Suggestion: To avoid such a big loss in the future, fines, penalties, and repurchase requirements, founders must hire knowledgeable lawyers to document the stocks in compliance with security laws


5.     Lack of employment documentation.

Hiring the first set of employees for your startup becomes a   typical process. Many startups often encounter legal mistakes when they do not make appropriate employment documentation.

Suggestions:  There must be a signed contract between employee and employer to save the business from litigation and court cases. The documentation should include an employment offer letter, Confidential Information Agreement, and Benefit forms (for benefits available to employees and family members).


6.    No protection for Intellectual Property.

Intellectual property is the most important asset of a company.  Your logo, brand name, innovation does not infringe with any other intellectual property.

Suggestions:   Timely, patent your innovation and trademark your logo or brand name. For this, the startup needs a legal expert for proper consultation.

7.    Avoid strong terms of agreement & privacy policy.

Terms of use agreement and privacy policy is the terms and policies used for people. The terms of use agreement describe many key points such as how to use the website and what are the limitations on users; disclaimers on warranties; how disputer can be resolved etc. Privacy policy covers these question such as how the information may be shared or sold to other parties, what age of users can use your product or services; and how can a company use the collected information.

Suggestions:  The founders or owner of the company should take the step to protect the confidentiality and security of the information collected. For that, all the founders need to sit and discuss the terms of use agreement and privacy policy.

8.    Ignore tax laws

In starting, business people forget the tax issues and don’t consider it seriously. It will become insignificant to handle all these common legal issues. Here are common tax issues such as sales tax, Income tax filing, and income tax return, etc..

Suggestions: A tax consultant should get hire to file all the issues. It is not legal compliance which only needs to once in a year.

9.    Not tracking expenses

Initially, startups have to fund their idea before launching the product or invest in the marketing of the business and purchasing the resource for nurturing it in the long run. Those expenses which have done by a startup may be big or small but the fact is, sometimes entrepreneurs forget to track the expenses. Many people come into senses when they have to go filing the tax return.

Suggestions:  Prepare a spreadsheet for tracking your expenses and revenues. Don’t let your money flow without knowing about. If you don’t have time to manage all the accounts, then hire an accountant to check all the expenses.


10.    Don’t Say no to Right Counseling.

Start-up businesses often ignore taking help of the legal counsel to avoid spending the money. Despite this, they feel to discuss legal issues with friends, relatives or others. While doing so, the founders lose the time to take quality advice of experienced legal counsel who can help them to avoid many legal problems.

Suggestions: Though it’s not too late for the founders to consider interviewing several lawyers or law firms. You can also check how a legal counsel would benefit you. Some of the legal areas you really need some advice for:

  • Corporation, commercial, and securities law
  • Contract law
  • Employment law
  • Intellectual property laws
  • Real estate laws
  • Tax laws
  • Franchise laws

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