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 on many things. 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. We have found there are a handful of areas that new companies in particular would be wise to address with legal counsel. These are across the board, no matter what the type of business you are in, or what your business structure. You can also visit our start up company frequently asked questions page.

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. 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.

The other thing you should know is that the law already imposes a fiduciary duty on each of you toward each other. This is true whether or not you have a contract, and even at a very early stage of your business. A fiduciary duty means each shareholder owes to the others a duty of “utmost good faith and fair dealing,” which is a much higher duty that people doing business with each other at arms length owe to one another.

A written agreement with your partner(s) can help everyone be clear about the scope of these duties. It can also help define things like ownership of intellectual property and how the business entity will be managed and governed.

Finally, a good written agreement will address what happens if one of you wants to leave the business. It may seem far away, but if you don't address it early it can be much harder to resolve when someone has announced an intent to leave.

Your Corporate Form

Creating a formal business entity, whether as an LLC or an S Corporation, is not required for you to start up your business. However, 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 Employee Compensation Mistakes for Startups

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.

Protecting Your Brand

As soon as you start using your business name, tagline or logo in business, you may be able to get trademark protection. Though it may seem early, the beginning stages of your business are actually the best time to secure protection for the words and images your customers will associate with your goods or services. Read more about trademark basics for small business owners.

How We 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.

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