Legal Issues For the Start Up Company
Legal Issues to Consider for Your Start Up Business
So you have launched your new venture and opened your doors (virtual or actual), after probably many months of planning. Congratulations! At slnlaw, we are lawyers but we also are a business and well remember those early days- the thrill of putting yourself out there for the first time, as well as the fear and apprehension, wondering what you just did and what is going to happen next...
If you are like most entrepreneurs, those months have been spent refining your product or service, coming up with a sales and marketing plan, finding some initial capital, and things of that nature. You probably didn't spend a great deal of time thinking about the legal issues many start up companies face. Those issues are, of course, no different for a start up than for any other kind of small business, but we have found there are a handful of areas that new companies in particular would be wise to address with a lawyer.
Agreements With Your Partners
Before there is revenue or significant cost pressures, your handshake deal with an old friend or colleague about sharing in decision-making, risk, and profit may seem perfectly reasonable. But remember this: 70% of small business partnerships ultimately fall apart, and by the time the realities of the business begin putting pressure on that relationship, you are in a worse position to reach agreement on the core elements of the relationship than at the beginning. Even if you are not ready to incorporate yet, a simple written contract covering the basics can save you time, money, and distraction down the road. You should also understand that, with or without an agreement, if you share ownership in your start up with anyone else, the law imposes a fiduciary duty on each of you toward one another. A fiduciary duty means each shareholder owes to the others a duty of “utmost good faith and fair dealing,” which is a higher duty than an employer generally owes to an employee, and a much higher duty that people doing business with each other at arms length owe to one another. This can be a treacherous area, and you should consult a lawyer as soon as you see signs of trouble.
Your Corporate Form
Incorporating, whether as an LLC or an S Corporation, is not required for you to start up your business, but as an entrepreneur it is important to protect your personal assets from liability for the debts of your business. As a practical matter, lenders and other people you do business with often require personal guarantees when dealing with a start up company, but you still want to do what you can to avoid personal liability either for debts or damage claimed by third parties as a result of your business. You should consult an accountant to determine which form is better for you from a tax and financial perspective- if done properly, either an LLC or an S Corporation will provide you the same liability protection.
Common Start Up Employee Compensation Mistakes
Deferred Compensation: We have seen many well-intentioned start up companies find themselves in trouble for the compensation agreements they have made with their original key employees. The start up “team,” knowing that some time may pass until either the company begins generating revenue or obtains outside funding, often agrees to defer portions of their compensation for a period of time. This is understandable, but very often goes against the requirements of the Massachusetts Wage Act. If the relationship sours and any of these key team members brings an action under the Wage Act, the deferred portions of his or her pay can become a huge liability for the company and its officers personally. The good news is that there are ways to structure deferred and incentive compensation that do not violate the Wage Act, and it is worth consulting with an employment lawyer to make sure your compensation plan is legal.
Hiring Independent Contractors: Many start up companies use the services of independent contractors, or "1099" employees or consultants. Sometimes this is simply a cash issue- if someone is not on your payroll you do not pay payroll taxes, workers compensation insurance, or unemployment contributions. Sometimes it is simply because you do not yet have a predictable need for services, or use part time services from people who have other jobs. You should be aware that the Massachusetts Independent Contractor law imposes very strict limits on who can lawfully be considered an independent contractor, and the cost of getting this wrong can be very high.
Your Business Contracts
There are many things you can do without formal contracts, but there are certain key relationships that should have their terms documented, including key vendors and customers or clients. These do not have to be long or complicated documents, but it is important to be clear early on about the terms that are important to your business. That said, be careful about downloading boilerplate contracts from the internet just to make sure you have a contract. You are sometimes better off with a simple handwritten or emailed summary than a contract that contains terms you do not understand and may or may not make sense for your situation. Learn more about business contract basics.
Frequently Asked Questions
Often the question we hear from new business owners is not about a specific issue but more generally "what questions should I be asking?" Below are some questions we think you should be asking, and their answers.
How do I protect my personal assets from business risk? Incorporating as an LLC, S Corporation, or other corporate form should protect you from personal liability for your business debts. You can lose this protection, however, if you do not observe the formalities of the corporate form or handle your accounting appropriately. For example, if you regularly use money from the business to pay your personal expenses without treating it as a debt from you to the company, or make decisions for the company without following your operating agreement, someone may later claim that the corporate form was a sham and that it was really just your own personal enterprise. This is called "piercing the corporate veil," and something that could come up if you have a dispute down the road and your business does not have liquid assets. You should work with your lawyer and your accountant to make sure you know what you need to do to preserve this liability protection.
How can I manage payroll and human resources functions? This can seem overwhelming, but the reality is that there are many payroll service providers who can take care of most of the hassle of taxes, withholding, and PTO accrual for you for a relatively low price. See our referral resources page for some local providers we know and trust. With respect to things like employment policies and practices, we can help you create an employment manual and other policies you need, and provide guidance on how to handle offer letters and termination issues.
What insurance do I need? If you have employees, you must carry workers compensation insurance, though in most industries that is not a significant cost. Other coverage you might want or need will depend on the nature of your business and the terms of your lease if you are renting space for your business. You can find some trusted insurance advisors on our referral page.
How do I protect my brand? You may not feel like you have a brand when you first start, but eventually as you gain traction in the marketplace people will begin associating your company name, your logo, and other images or visuals associated with your business with the services or products you provide. Obtaining a trademark on your logo and/or your business name is a relatively simple matter, especially if you do it early on before anyone is interested in copying it.
How can I find other entrepreneurs to network with and share ideas? This is not a legal question, but a need we hear almost 100% of the time from new business owners. Especially if you don't have partners, it can be a lonely job and easy to second guess yourself, whether you are looking for wisdom about sales and marketing, business operations, financial management, risk management, or anything else. We walk in those shoes too- slnlaw is a law firm, but also a business, and we have faced many of the same obstacles you are facing or anticipate facing. This is part of why we have assembled our list of referral resources, but we also frequently make introductions (with client permission) between businesses in similar industries who might be able to help and support each other.
When should I call a lawyer? If you were a big company with an in house legal department, you might walk down the hall and ask a question before you sign a contract, make a job offer, launch a product or service, or make any number of other business decisions. Small business owners do not have that luxury, and yet those could be the most important 15 minutes you spend if they help you avoid an expensive problem or worse, a lawsuit. We welcome you to call us if you have any doubt- sometimes we can point you in the right direction as part of our free consultation, but if it is necessary to hire us we have no problem being engaged for a small amount of time if it helps you move forward.
"Slnlaw did a fantastic job helping me set up my small business. Their attorneys were very friendly and knowledgeable, and I never felt pressured to purchase any service. I would definitely recommend them!" Michael S.
"It was a pleasure working with Emily Smith-Lee on a business matter. She willingly shares her expertise and always listens to her clients' concerns. Emily's caring demeanor puts people at ease immediately. The outcome of my experience with slnlaw was quite favorable. I would highly recommend them." Camille B.
"As a small business owner, I've had the best experience I could have hoped for. They've offered smart advice, like simplifying legal issues so that its clear what actions I can take. I've really appreciated the clarity I've gotten from them, and I always leave the office feeling completely capable and confident about what I need to do next. I also can't say enough about how much their firm puts my business first. They really care about making sure I do what's in my best interest and at the right time and they don't seem worried about anything else but making sure I'm doing the right thing for my company. I have a lot of confidence in recommending this group, both for their great advice and because I feel like it comes from a really good place." Ben L.
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How slnlaw Can Help
These are all important issues, but we want to make sure you are able to focus your time and energies on growing your business- after all, the best way to avoid problems is to succeed, and we want to be your partners in success. Our lawyers can help you incorporate your start up business, document your relationship with business partners, review or create your business contracts, and review your employment and compensation practices to make sure you are protected from liability. If you think your business may need ongoing support, you may benefit from our small business membership program- just ask about it at your consultation.