Start-Up Business Lawyers
What Is a Start-Up Business?
A start-up is an undertaking that has recently begun operation. Starting your own business can be an exciting financial endeavor with many potential legal pitfalls. An effective business plan will help to protect a business from many of these legal problems. When starting your own business, the business plan should consider the following:
- Labor and Employment Issues
- Intellectual Property Risks
- Business Entity
The business plan should address the adequacy of capitalization, the amount of cash and assets invested to start and operate the business. To minimize the legal risks created by improperly funding the company or misrepresenting facts to investors:
- The business should have the initial assets reasonably necessary to meet its reasonable debt obligations
- An owner should not mislead investors as to the amount of capital needed to start and operate the business
- The owner should use spreadsheets outlining in reasonable detail the amount of the projected startup costs, working capital, capital expenses, operating expenses and revenue
- If there is more than one owner, create a founder’s agreement (a contract between the owners detailing the structure, terms, roles and duties of each party) so that each owner understands their responsibilities and rewards
Labor and Employment Issues
The business plan should describe the duties and responsibilities necessary to achieve business success, and should carefully assess staff hiring. To minimize the legal risks of claims by investors, owners, and employees, a company should consider:
- Assigning a manager or team to each responsibility
- Describing the basic process or strategy used to manage the identified responsibility
- Ensuring the proper identification and assignment of the duties
- Using background searches and references to maximize chances of hiring qualified and trustworthy staff
- If you wish to outsource certain jobs to keep costs down, be sure to keep all legal rights with the startup and not with the independent contractors
- Keep a list of all federal and state licenses/permits, such as business and sales tax permits
Intellectual Property Risks
The business plan should address the intellectual property ("IP") risks impacting the business. Some steps to minimize those risks and maximize IP value include:
- Identifying the key IP, including company name and branding
- Implementing a strategy to protect and enhance the IP, such as filing a trademark, or patent application, or using confidentiality agreements with employees
- Assessing the impact should the business experience a challenge to its IP
The owner should carefully assess the choice of entity he will use when forming the business. Options include a sole proprietorship, partnership, and corporations, among others. The entity selected will depend upon business goals, the number of owners, and the owners' role within the company.
The following is a brief description of some of the organization options a new business has:
- Sole proprietorships, ownership by one party, takes on all the risks of business, including debt and legal liability. If any problems arise, the sole proprietor will be held responsible. However, the sole proprietor also maintains full control over the business and takes in all the profit after expenses.
- Partnerships are divided into two categories: general partnerships and limited partnerships. General partnerships are similar to sole proprietorships, except that more than one owner controls and manages the business. Limited partnerships, however, have certain parties play a less active role. Typically, a limited partnership has some of the partners provide financial support only. Although these limited partners take in a percentage of the profit, their involvement is restricted. Limited partners have less control over the management of the business.
- Corporations are legal entities separate from the owners who control them. In other words, the primary benefit of a corporation is that liability, including debt, is restricted to the business entity; the owners cannot be held legally responsible for the business’s actions without a specific court order. In exchange, however, the corporation must follow certain federal and state laws which other business entities are not bound by.
- Limited Liability Companies, LLCs, is an entity which holds a mix of corporate and partnership features. LLC, like corporations, are separate legal entities from their owners. They also have a choice in taxing structure which comes from being a hybrid of other entities; LLCs can choose to file taxes as corporations or partnerships. An LLC’s structure is usually less defined then a corporation, making investors wary of supporting them too much.
A company can protect the confidentiality of sensitive information primarily by:
- Requiring individuals to sign a non-disclosure agreement ("NDA") in advance; or
- Requiring individuals to sign a non-compete agreement in advance; or
- Limiting employee exposure to sensitive information.
Do I Need a Lawyer?
The start-up industry poses many potential legal complications. Consulting with legal counsel prior to negotiating any formal contracts or IP privileges is always a wise thing to do. Speaking with the appropriate lawyer will inform you of your rights and protect your interests.
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Last Modified: 04-11-2012 11:53 AM PDT