8 Key legal issues when starting a new business

It is easy to make mistakes when starting a new business. There are a lot of things to do, you want to get it off the ground, but the process can seem overwhelming. There are a number of important steps you should take to give your new business a solid legal foundation. This will avoid more serious problems later on. Here are eight key legal issues to consider:

1. Choice of business structure

First, it is important to form a legal entity, usually either a limited liability company, or LLC, or a corporation, mainly to shield the owners from personal liability. Whether to form an LLC or corporation depends on a number of factors, such as taxes, the type of business, and whether you plan to seek outside investors. A business attorney and a CPA can advise on choice of entity.

2. Founder responsibilities and agreements

If the company has more than one founder, it is critical to agree on what each founder is contributing (capital, intellectual property, “sweat equity”, etc.) and how much ownership percentage each founder receives. Pro-rata ownership is not always best, depending on what each founder is bringing to the venture. In addition, the founding shareholders, or members if an LLC, should have a written agreement covering ownership, management issues, restrictions on transfer of ownership interest, and other important issues.

3. Protecting intellectual property

For many companies today, the most valuable asset is some form of intellectual property, whether it is a new patent, software, trademarks, trade secrets, or licensing agreements. The company should have a clear transfer of ownership of the intellectual property from whichever founder is contributing it, or a clear license to use it from the owner. The company should also take steps to make sure that its use of intellectual property does not infringe on the rights of other intellectual property owners. Use non-disclosure agreements when sharing confidential information with potential partners or vendors.

4. Raising capital

While some companies can finance their own founding and growth (sometimes called “bootstrapping”), many startups need outside investment. Early on this may come from “friends and family,” and later from angel investors. Depending on the growth plans of the company, it may even seek larger infusions of capital from venture capitalists. Whatever the source, if a company is selling an equity ownership interest to an investor, it must comply with federal and state securities laws. These laws are intended to protect investors—even sophisticated ones—by requiring companies to disclosure information about their business and the risks of investing. While these laws do provide various exemptions for small companies, securities law is very complex and you need an attorney to guide you through this maze.

5. Employees and independent contractors

If you plan to hire employees, you must pay unemployment insurance tax, have workers compensation insurance, and make necessary withholdings from employees’ paychecks. You must also follow wage and hour laws regarding overtime and related pay issues. An employee handbook is also important even if you only have a few employees.

If you plan to use independent contractors to provide services, such as web design, it is important to make sure that they are truly independent contractors and not employees, as misclassifying them can be expensive.  Both the IRSand the Colorado Department of Labor and Employmenthave checklists for proper classification of independent contractors.

6. Written contracts

Doing business “on a handshake” is easier and can seem cheaper than creating and updating written contracts with customers and suppliers, but in the long term a written standard form contract or set of terms and conditions will make life much easier. Even if your contract has to be tailored to a specific situation, starting with your own standard form that is favorable to your business will give you an advantage. Also, people move on and memories fade, so if there is a dispute over a verbal contract, it may be hard to prove what the parties had originally agreed to.  Written contracts avoid that problem.

7. Website issues

Most companies have websites to provide information about their business or allow users to purchase goods or services online. Your website should have a well-drafted set of terms and conditions governing use of the website. It should also have an effective privacy policy, informing users what type of information you collect from them, how you use it, and how you protect it. This is especially important given the recent concerns about online privacy. Also, if you will collect information from users or customers in the European Union, the EU’s General Data Protection Regulation (GDPR), which took effect in 2018, is much stricter than U.S. laws about handling personal information.

8. Documentation and recordkeeping

Good recordkeeping is important for a new business. If your company is a corporation, state law requires it to keep certain records such as meeting minutes. Investors will also conduct extensive review, called due diligence, of company records before investing capital. And good accounting records are critical for accurate financial records and tax obligations.

Don’t avoid these issues just to save money!

Most new companies have limited funding and look for ways to limit expenditures. Hiring an experience business attorney to guide you through the complexities of starting a business is money well spent and will save money in the long term. It is cheaper to do it right now than to fix it later. If you have questions, please call Mark Spitz at 720-575-0440 or email at mark@spitzlegalcounsel.com.