Launching a new business can be an exciting experience, and hopefully, one that leads to long-term success.
In addition to having a good idea, a strategic plan, and the determination to see it through, entrepreneurs must also consider a wide range of legal issues from forming the appropriate entity to protecting the business from personal injury lawsuits.
By preparing for these and other legal concerns, the mistakes that undermine many startups can be avoided.
1. Business Structure/Licensing
There are a number of factors involved in selecting the right business structure such as the type of business, the costs associated with forming a particular entity, as well as the tax implications. The most common legal structures include a sole proprietorship, partnership, C-corporation and S-corporation. There may also be a need for a variety of licenses or permits. At a minimum, it will be necessary to obtain a business license from a local or state agency as well as a tax registration.
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2. Written Agreements
It is essential to put in place written agreements clarifying the rights and obligations of the parties engaged in running the enterprise. Typical arrangements include partnership agreements, shareholder agreements, and employment agreements, all of which should include non-compete provisions to prevent the potential transfer of sensitive business information to competitors in the event an owner, executive or key employee departs.
If the small business is a partnership, it is also crucial to institute a buy-sell agreement to provide for the orderly distribution of a departing owner's interest and ensure business continuity. Lastly, businesses that enter into contracts with vendors need to protect their trade secrets by utilizing confidentiality and non-disclosure agreements.
3. Protecting Intellectual Property
Startups that are introducing innovative products and new concepts to the marketplace must protect intellectual property such as patents, trademarks, and copyrights. Patents and trademarks that are registered with the U.S. Patent and Trademark Office offer a business the power of exclusivity which can set it apart from its competitors and maximize profits.
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Copyrights give a business the exclusive right to use original works such as books, photographs, musical recordings and even computer programs and software. Generally, these works are protected once they are created, but registering them with the US Copyright Office offers powerful legal recourse to file a lawsuit in federal court in the event of infringement. The value of IP cannot be underestimated and it is necessary to protect these assets to avoid being infringed or infringing on the rights other entities.
4. Employment Law
A business owner needs to be aware of a number of federal, state and local employment laws. First, Title VII of the Civil Rights Act of 1964 makes it illegal to discriminate against employees and job applicants based on race, color, national origin, religion and gender. Under the Age Discrimination in Employment Act, employers cannot discriminate against individuals who are 40 years of age or older. In addition, persons with disabilities are protected from discrimination and harassment under the Americans with Disabilities Act. Other important laws include the Equal Pay Act, Family Medical Leave Act, the Pregnancy Discrimination Act and workers' compensation laws.
Small business owners must also comply with wage and hour laws, starting at the federal level with the Fair Labor Standards Act. This law requires workers to be paid a minimum wage of $7.25 hour as well as overtime at a rate of time-and-a-half for hours worked over 40 hours per week. Of course, many states and cities require employees to be paid a higher minimum wage.
5. Premises Liability Lawsuits
Business owners that have a brick and mortar location often find themselves the target of premises liability lawsuits filed by customers, vendors and other visitors injured in slips, trips and falls. These accidents can occur when a visitor slips on a wet floor, or on ice or snow on a sidewalk or parking lot. Other dangerous conditions include torn carpets, broken steps, poorly lit walkways, or falling merchandise. In short, a business owner is responsible for the safety of any visitor to the premises.
In order to protect the business from exposure to such lawsuits, it is essential to obtain general liability insurance. Injury victims may be entitled to damages such as lost wages, medical costs and pain and suffering. Not only can a comprehensive policy cover the costs of these damages, it can also cover the legal costs associated with defending these claims, many of which are resolved through a negotiation with personal injury attorneys and insurance companies.
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The Takeaway
The foregoing are just some of the critical legal issues that an entrepreneur must bear in mind. It is a common mistake for many to think they can go it alone, however, and only seek out an attorney when trouble arises. By then, unfortunately, it may be too late. While many startups are faced with budget constraints, legal costs should be factored into a business plan.
There are also creative ways to minimize these costs, but a simple consultation at a minimum is a must. Beyond that, a highly skilled attorney can help with filing the required documents to set up a business, negotiate and prepare a variety of necessary agreements, and if need be, mitigate the damage of a premises liability lawsuit. Without proper legal counsel, breach of contract disputes, employment discrimination actions, IP infringement claims and even personal injury lawsuits can upend a startup business.