From the beginning, startups must take legal steps to protect their interests. Therefore, they should document all employment matters, including contracts with employees and HR-related issues. Additionally, startups must protect their most important asset, their intellectual property. Protecting intellectual property will stop any competitors from stealing the startup’s potential for success.
Unfortunately, once the startup is established, the legal issues don’t stop. To prepare for the future, the startup founders should set aside a larger than expected legal budget. To help keep legal fees down, keeping the founders on board is an important goal. Picking the right attorney upfront will also keep legal expenses down. It is wise to do background on attorneys before hiring them to advise on proper business structure and tax obligations.
We take a look at startup legal advice for New York companies dreaming of success. By utilizing these 7 pieces of startup legal advice, the founders can mitigate future legal spending. By implementing the following strategic legal practices, founders will start the company on the path towards long-term success.
Consider Your Startup Legal Advice
Not all legal advice is created equal, and the advice can impact the business. Before hiring an attorney, do research and check the attorney’s background. The following considerations should be evaluated when choosing an attorney:
1. Resources and Connections- Good attorneys can help create or widen your network. If they have done a lot of work with startups, their potential benefit reaches beyond the law. An attorney can introduce you to potential clients or resources to help your business prosper.
2. Shared risk value- If your company is risk-averse, it is not smart to hire a freewheeling attorney. Find someone who matches your risk appetite.
3. Cost and type of legal work- Simple contract work can be done at lower rates. There are New York attorneys charging over $1,000 per hour. For simple work, any attorney with a background in contract or business law will suffice.
Choose Your Business Structure
A mistake startups make is choosing the wrong structure. Generally, as a startup, there are two options an LLC or Corporation. Both entities provide the owners with protection of their personal assets.
Under corporations, there is a C corporation and an S corporation. To qualify as an S corporation, the company must have less than 100 stockholders. S corporations provide for pass-through taxation. Therefore, an S corporation does not pay income tax, but stockholders are responsible for profits and losses.
LLCs give their owners some tax advantages compared to corporations while limiting the owner’s personal liability. Like corporations, LLCs are a pass-through entity.
Budget More Legal Spending Than Anticipated
Startups commonly fail to establish a legal budget or establish an insufficient legal fund. Unfortunately, startups largest legal costs occur in the beginning. A startup’s legal fund must anticipate consulting with an attorney on business structure, required documents for filing, and tax advice. Additionally, as contracts start happening, it is wise to consult an attorney before signing the agreement.
Lastly, startups fail to consider the potential for lawsuits. Lawsuits, whether you are suing or being sued, are not cheap. Litigation is likely to cost companies thousands, if not tens of thousands, of dollars in legal fees.
If something goes wrong, a startup will rely on legal experts. Therefore, it is important to add a little extra to your budget for legal fees.
Document Employment Matters
Startups run into trouble down the line when they fail to keep proper employee records. Unfortunately, former employees sue their employer. To best protect themselves, companies need to keep records of all complaints and employment matters.
From the start, companies need to save employment agreements and job applications. Keeping these will protect the company from any hiring discrimination claims. Additionally, saving employee compensation and termination notices protects a company from discriminatory claims.
Startups typically do not have an HR department. Therefore, it is essential they save company and employee policies and employee personnel files. In the event of a lawsuit, these documents will be brought into the spotlight. Lastly, the company must save all employee complaints and their responses to those complaints.
Don’t Forget to Protect Intellectual Property
As a startup, a valuable step to take is to protect intellectual property. Your thoughts and ideas are the basis of your startup and will be what carries you to success. Fortunately, there are several legal ways to keep your intellectual property from the public. To protect the company’s intellectual property, there are steps you can take, including:
· Patent: The owner can prevent others from using their invention.
· Copyrights: The owner has exclusive rights over their work.
· Trademarks: The company’s unique symbol.
· Trade secrets: Information providing a monetary advantage to the owner.
· Confidentiality agreements: Prevent employees from sharing company information.
Keep Your Co-Founders Onboard
When co-founders leave, a string of headaches can follow. Many of the issues arising after a departure land in the legal category. When a co-founder leaves, they are likely going to want a piece of future profits. There will eventually be a lawsuit to determine how much of the company they are entitled to, which can last years.
To avoid this headache, there are several solutions. First and foremost, foster a healthy relationship with your co-founder. Doing so avoids a founder from leaving the company. Second, prepare an airtight co-founder agreement. This agreement should lay out what happens if one founder leaves the company.
Understanding Tax Obligations
Every companies’ nightmare is getting in trouble with the IRS. Therefore, when the owners pick a business structure, they need to understand its tax consequences. An owner must purchase an Employer Identification Number from the IRS. In addition to the state tax ID number, banks require the company’s EIN to open a bank account.
Once you have obtained an EIN, your company is now eligible to do business. Startups need to pay attention to potential tax consequences to avoid unforeseen taxes and consequences. Moving forward, companies need to anticipate sales taxes, payroll taxes, and tax incentives.
Hiring a CPA or tax attorney is the best way to ensure tax compliance. To provide the tax professional with correct information, companies should document all income and deductible expenses.