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The Top Legal Mistakes Startups Make and How to Avoid Them

by | Jun 13, 2023 | Startup Lawyer

The Top Legal Mistakes Startups Make and How to Avoid Them

So, you’ve taken the plunge and started a brand new business. Congratulations! Now what?

There’s no denying it’s a massively exciting time, but with that comes a lot of stress (and some uncertainty) about how the process will go, whether you’ll be able to make it a success, and last but not least, the legal mistakes that you might encounter.

Many people going into business for the first time will make these errors. It’s a fact of life. However, it’s also true they can cost a lot of money to put right. Not to mention lost hair.

Startups can be more vulnerable (and especially first-time entrepreneurs), whether it’s taking into account negotiating contracts, the safety and security of workspaces, and even intellectual property.

Some new business owners completely ignore legal realities and might only deal with problems when they crop up – as opposed to planning for them in the long term.

On paper, it sounds like the former might be the best and most economically viable solution, but in practice, it can end up costing more long term.

Happily, we’re here to take the worry away. Here are some of the most common (and avoidable) legal mistakes startups make and how you can be savvy and avoid them!

Forgetting to fully register a startup

How a start-up is structured is key to ensuring it’s registered in the correct way. You’d be surprised at how many businesses aren’t well-versed in this!

Making sure a business is properly registered ensures that it’ll take into account how it operates now and in the future.

For instance, is the business a sole trader operation, or a limited liability company?

Ensuring this is all set-out, legal, and above board will mean a startup performs well from the start and going forward.

All the information should be laid out in a written document that shows how everyone and everything functions within a business (even if there is just one of you).

Rev up your registration: Do all of this on day one of company formation, and it’ll ensure greater financial health in the future. It also helps if the structure of the business alters down the line, or extensive changes need to be made.

Forgetting basic legal requirements

You’ll fail at the first step if you don’t have any legal agreements in place at all from day one.

Legal agreements are needed to make sure that the business owner and employees are always aware of their obligations from the outset, and that they can be acted on accordingly if it’s needed.

Why might startups neglect this? They may have taken bad business advice, may not fully be aware of their responsibilities, or may simply not be willing to take on any extra costs!

But in the long run, failure to meet basic legal requirements can be a costly mistake to make with serious financial consequences that can harm a business.

When a business is formed, getting the correct legal advice is the difference between building a positive future for a company or watching it fail at the first hurdle.

Your lawyer will draft documents and use their knowledge to guide you in making the correct decisions. Know any legal pitfalls you might encounter and you’ll save a lot of money and time in the future.

Don’t be tempted to draft legal documents yourself to save money. Professional legal input is essential as they’ve got the knowledge and expertise to make it work! It’ll ensure that legally watertight and correct information is given, as opposed to potentially dodgy advice.

Don’t rely on online templates, go straight to a fully qualified lawyer with business expertise.

Be savvy: Find out what your legal obligations are from the outset. Discover which legal documents you need and ensure you get some good, impartial legal advice. Good business relationships can sour quickly and you need to make sure you’re protected for every eventuality.

Forgetting to put employment agreements in place

When you reach a certain level of business success as a start-up there will eventually be a need to employ more staff in order to help an expanding company.

When this happens it’s important to ensure that the correct agreements are in place so that every single person is properly legally protected. It really is in the interests of the business just as much as it’s in the interests of the employees.

Employ your legal skills: Set all these agreements up before any hiring and firing is done. Make sure all parties know their rights and know their legal protections. Don’t leave it too late until the need for extra workers becomes so great that this kind of legal documentation ends up being neglected.

Forgetting to comply with data regulations

It’s true that data protection laws have altered a lot over the last few years and will probably keep altering over the next decade.

However, a lot of startups and small businesses are still not fully compliant when they’re handling data. In fact, recent studies suggest that as many as a third of all businesses are not compliant with Data Protection laws which is a real concern and worry.

Any business that collects or handles data of any kind has to ensure they’re fully compliant with these guidelines. Included in this are factors like marketing activity and campaigns and how a start-up stores customer data. They also must make clear to their customers their terms, conditions, and privacy policies.

Deal with data: Make sure you’re up to speed on data protection laws and act accordingly if you’re not compliant with some or all of them. If you’re unsure, then take some legal advice so you can avoid getting into trouble further in the future.

Forgetting to protect intellectual property

When beginning a startup it’s absolutely normal to get a little, shall we say, over-excited and want to overshare all your news.

But, hold on and hold back.

You mustn’t disclose any information that isn’t yours to tell. Especially if there is no copyright or patent on it. This is potentially very dangerous as it allows other people to sneak in and steal your ideas. Keep your ideas and intellectual property to yourself until it’s all watertight.

Intellectual property protection: Unless your ideas and business are already fully legally protected you might want to look into using something like non-disclosure agreements for any other people connected with the business, so in the event something is leaked or stolen, you can prove it (and who did it).

Forgetting to protect their property

Protecting your intellectual property is one thing, protecting your actual property is another.

You’d be amazed at the number of people who create a start-up and don’t think to make sure that all the property they own and the fixtures and fittings within it aren’t safe from either insurance claims or a legal standpoint.

Ensuring you’re properly covered means that down the line if anyone is injured – or accuses you of unsafe work practices, you can stand up for yourself and prove otherwise.

Protect your property: Make sure to get legal advice and understand your obligations to others in the workplace (not to mention ensuring all your physical property is protected and legally covered too)

Forgetting to limit their liability

Who wants to think about what might potentially go wrong when they’re starting up a new venture? No one wants a Negative Nancy on board.

Unfortunately, this is something that has to be looked at sensibly. Preparing for all eventualities and problems that might occur down the line ensures you’re looked after and protected from future serious consequences. If any complications do arise it’s then always possible to try and limit how much damage is done.

Know your limits: Understand that terms and conditions are put in place to limit your liability if a situation like this occurs. Always better to be prepared, and never have to use this type of legal consideration, rather than not to have it and end up facing financial problems.

Forgetting about filing systems

We know how boring filing is! But keeping accurate records and then maintaining them and making sure they’re kept safe and sound in both digital and physical copies is essential to keep track of a business’s activity.

If there are no files in place then it becomes more difficult to understand whether or not a business is functioning as it should and is operating within the realms of the law.

Filing and accurate record-keeping are essential to also see how a business performs year to year and to plan ahead to future-proof it.

File like a pro: Record and keep both digital and physical copies of all paperwork. Use secure cloud systems and even more secure filing cabinets. Over time it’ll make it much easier to keep track of how a business is performing.

Forgetting to keep on top of funding

When a start-up is founded it relies on a lot of hard work and money being poured into it, whether it’s as a sole trading business or as an LLC.

So, you might want to think about issuing something called founder shares. But… wait…hold your horses. It’s prudent to not issue these too soon, or give too much financial responsibility too quickly.

A startup needs a little consistency, reliability, and graft to make it a success in the short term.

Giving free rein with money straight away can sometimes lead to laziness and a lack of personal investment in the working culture. Be very careful ultimately who you award money or shares to.

Don’t be a financial flop: Only ever give shares/extra money to those people who have stuck with it and grafted, giving their time, money, and dedication.

Forgetting to file business tax

It’s not always possible to keep abreast of every single new tax development there is, but this is why accountants exist!

New businesses might not always consider every possible implication of the taxes they do (and sometimes don’t) pay. Sometimes responsibilities are misunderstood and tax issues aren’t dealt with correctly or paid on time.

You don’t ever want to face a huge tax bill, or being prosecuted for non-payment so read up on what you are likely to need to pay, and make sure you know what you owe every single month. Avoid costly legal action.

Be tax savvy: It’s important to consider hiring an accountant, someone with the financial acumen who can make sense of all your finances, and help you understand what you need to pay and what you can afford.

Forgetting about legal issues and letting them drag on…

After reading all this, if there IS some small chance that there may be legal trouble ahead for you as part of a startup, then it’s best to tackle it head-on and not avoid it (however tempting it may be).

The more promptly they’re dealt with, the better you’ll feel and in the long term, it’ll help the business as you’ll have been proven to be responsible.

Don’t dilly-dally: Not sure if you’ve got a long-term legal problem or not? Get some impartial advice from a lawyer. Dealing with issues straight away means you can overcome them more quickly and you’ll not be caught out again in the future.

So, now you’ve read our handy guide, you’ve no excuse not to be a complete legal pro when it comes to building your start-up! Go forth and do great business, staying fully within the law at all times.