DISCLAIMER: The author is an attorney, but he is not your attorney. Everything here is information, not legal advice. How do you know? This is free. Legal advice you have to pay for.
Starting a new business is exciting, but managing legal issues is not. While your legal issues are unique to you there are a few questions almost all early-stage entrepreneurs ask, and there are some they should be asking. Let’s review both.
The question: Do I create an LLC or corporation?
Creating a separate legal entity is a great way to create some liability protection and build legitimacy, but do you want an LLC or a corporation? First, if you are expecting venture capital investments within the next year, create a Delaware C-Corp. It’s the most common entity for large investors, and most will not do business without it.
For everyone else, it is a multi-layered answer. It depends on your investment strategy, how you will be taxed, and how you manage the company. You need to talk to an attorney or CPA about this, because it is unique to you, your industry, and your revenues.
You should be asking: What do I need to do to start work?
Legal entities are not required to start in business and insurance can provide liability protection. However, getting an occupational license from the Parish or city is required to even start. If you are operating in a space, you may need zoning approval and inspections. If you are selling goods, you need to register for sales tax, and if you are in the food industry there may be health regulations. Check with all the local requirements before you begin.
The question: How do I protect my ideas?
People want to protect their ideas, but intellectual property (IP) laws are designed to protect your finished product. Patents protect your inventions. Trademarks protect logos, slogans, product names, and the like. Copyrights protect creative works, like pictures, writings, even arrangements.
Copyright and trademark protections are automatic. By using them in commerce you get protections, but they are limited to your region and use. If you want broader protections and more enforcement rights you need to register them with the USPTO.
You should be asking: Am I violating somebody else’s IP?
IP infringement is a two-way street. While you are protecting your million-dollar idea, you may also be infringing somebody else’s IP. Infringement can be reusing an image from the internet for your website or copying code from your employer. Perhaps your company or product name sounds like somebody else’s. Infringement can be very expensive so do some due diligence any time you use IP from somewhere else.
The question: What Contracts Do I need to work with others?
Contracts are the legal infrastructure of all transactions, so having yours in order puts you in control of your business. You need contracts for any vendors, contractors, and customers. Your website should have terms and a privacy policy. If you are raising money, make sure you have SEC compliant documents in place. Any intellectual property should have licensing agreements or clauses.
You should be asking: What contracts do we need to work with each other?
Starting a business with partners is one of the best ways to succeed. But the founders need to come to an agreement at the beginning as to how decisions and profits will be split, and to ensure that people stick around. Founders’ Agreements set those guidelines and are a major component to resolving later legal issues. Many investors will not take a company seriously if they do not have reasonable founders agreements in place.
Final Word
There are typically two types of entrepreneurs: those that ignore legal issues until it is too late, and those that overdo legal issues at the beginning. Some fail due to expensive litigation that could have been resolved with a contract. Others spend so much on logos that they’re broke before launching a product. It’s hard to find the correct balance between growth and protection. Do not be afraid to speak with a small business or startup attorney that can guide you through those decisions.
By: Sean Morrison, managing owner of The Sean Morrison Law Offices LLC.