Launching a startup is an exciting endeavor. But it is also risky. According to statistics, 90% of startups fail, while the success percentage for those that survive is about 15%. Startups can fail for various reasons. One of the most overlooked reasons is legal missteps. In California, even one simple legal mistake can result in fines, lawsuits, or the downfall of an otherwise promising startup. If you are planning to start a business, you need to pay attention to legal matters, as overlooking important legal considerations could have adverse consequences. The following are six of the most common legal mistakes that startups in California make that you should avoid.
The first decision you need to make as a startup is choosing a legal structure, such as an LLC, Sole Proprietorship, or a corporation. The decision of which business structure to choose is one of the most important decisions you will ever need to make as a business owner. Unfortunately, many startups choose the wrong structure for various reasons, such as convenience or cost.
Choosing the wrong business structure can harm a startup in several ways. For example, choosing the wrong business entity could result in tax consequences such as double taxation. It could also result in personal liability risks. For instance, if your business is sued for a product defect, you could be held personally liable if your entity does not offer liability protection, such as an LLC or corporation.
To protect your startup, consult a business attorney or accountant before choosing a business entity.
A founders’ agreement is a contract between co-founders that outlines the terms of their business relationship. The agreement outlines each founder’s rights, responsibilities, liabilities, and obligations. If you are forming a startup with other people, it’s best to create a written founders’ agreement early on. The agreement can address a wide range of provisions, including ownership structure, transfer of ownership, and dispute resolution.
Intellectual property (IP) includes patents, trademarks, trade secrets, and copyrights. These are valuable assets to startups. However, many startups ignore IP protection. Failing to protect intellectual property can leave your startup vulnerable to infringement and loss of competitive advantage. You could also face lawsuits if you unknowingly use someone else’s protected material.
Take time to understand your industry’s regulatory landscape to ensure compliance. From permits to licensing to health and safety regulations, overlooking legal requirements can result in severe consequences.
Even if you start your business with a small team, ensure you do not skip formal HR policies and procedures. Failure to comply with California employment laws, which are among the strictest in the country, can lead to costly legal issues.
Avoid entering into oral agreements with partners, vendors, or clients. While oral contracts are generally enforceable in California, they are risky. Not having written contracts can lead to disputes.
If you are launching a startup, our business attorneys at SAC Attorneys LLP can offer startup legal services to help you establish a solid foundation on which to build your business. Contact us today to schedule a consultation.