As an entrepreneur who is starting a company, there are a lot of things on your mind. During business formation, many founders treat legal issues as secondary concerns. They may focus on other aspects of the business, such as building their product or talent recruitment, for example, and hope to address legal issues later.
Needless to say, this lack of attention to startup law can lead to huge legal problems in the future, including issues related to compliance, intellectual property protection, and entity structuring. Such issues can haunt a promising startup for years, bring out concerns during capital raising, and even contribute to a startup’s downfall.
From the initial days of your startup, an attorney can ensure you’ve handled pressing and any other overlooked but salient issues before they become a problem. At Fridman Law Firm, we understand how entrepreneurs get excited to enter the market with their amazing concepts. Our lawyers take the headache out of trying to navigate the highly complex legal system so that you can focus on your core business functions. We guide entrepreneurs through all stages of their businesses, from the launch of startups to growth and exit.
As trusted advisors, you can expect our legal team to ensure that:
- All possible case scenarios and legal pitfalls are foreseen
- All checks and balances are put in place
- The startup has a strong foundation for growth and expansion
Fridman Law Firm will work closely with you to handle and negotiate agreements, funding, and any other legal needs so that you can confidently grow as an emerging firm or early-stage startup.
What Is Startup Law?
Startup law is a specialized area of business law that focuses on the legal needs and issues affecting startups and emerging companies. It deals with a wide range of legal issues that entrepreneurs may face when establishing and growing their startups. These issues may include business formation and structure, intellectual property, funding, regulatory compliance, taxation, contracts, and employment.
How to Create the Right Business Entity
When starting a business, one of the first things to consider as an entrepreneur or founder is the appropriate business form. The excitement of starting a new company can cause entrepreneurs to rush in before everything is in place. If founders don’t take each step carefully, their businesses may face legal hurdles that end up hurting their bottom lines or even causing them to fail.
One of the critical decisions you must make during the formation of a startup is how you are going to structure it. Establishing a separate entity for your startup creates a legal distinction between the founder as an individual and the startup.
A startup lawyer can be a great resource during the formation of a company, and they can help you choose between various options depending on the specific requirements of your business. Here’s a breakdown of common entity formations that startup founders may opt for.
A sole proprietorship is a business that isn’t a separate legal entity from its owner and is the simplest structure to form. Legally, a sole proprietor is deemed liable for business activities, including expenses and debts, as well as tax obligations.
Divided into either general or limited partnerships, this type of business formation allows you to pool resources and talents to co-own a business. The main difference between these partnerships is that general partners enjoy complete operational control of the company but may be held personally liable for the company’s debts. In contrast, limited partners don’t participate in the day-to-day running of the company and therefore have less liability.
Limited Liability Corporation
Often abbreviated as an LLC, a limited liability corporation is a form of business that offers its members limited liability. While an LLC provides tax benefits to its members, forming such a startup requires filing Articles of Incorporation or Organization and executing an operating agreement (sometimes called a limited liability company agreement or LLC agreement), which sets out the decision-making procedures, interest allocation, and profit sharing among stakeholders, who may include:
- Other LLCs
- Foreign entities
This is a separate legal entity that is liable for its own debts and obligations and is a preferred entity choice for investors. Under United States federal income tax law, shareholders in C corporations are taxed separately from the entity. Qualified Small Business Stock (QSBS) companies are required to be C-corporations, which provides an extremely beneficial tax incentive for the company’s stockholders if the company meets all of the eligibility requirements.
The S Corp shares similar characteristics with the C Corp, with the main difference being the tax structure. Here, income is only taxed once it is in the hands of shareholders. Since they are pass-through entities, such startups don’t pay corporate tax.
Understanding and choosing which structure best suits your needs must be done early to limit your and your startup’s liability. Still, figuring out the ideal company structure at such an early stage can be tough for many startups and even seasoned entrepreneurs. A startup lawyer can help you weigh the pros and cons of each business structure to ensure that you choose the right entity for your future plans and needs. This could ultimately translate to savings on taxes, reduced exposure to liability, and smooth financing and running of the business.
Fridman Law Firm’s startup attorneys understand the ins and outs of corporate law and are ready to offer you the help you need to determine which business structure is ideal for your particular situation.
Why Do Startups Need Lawyers
When starting a business, most people almost entirely focus on getting their goods or services out to the market, whether it is a new mobile app or SaaS product. Of course, getting your startup up and running is crucial, but you also have to consider your business strategy’s legal implications. Consulting an attorney for general counsel sooner rather than later can help you manage business risks and avoid adverse legal consequences.
Here are some of the reasons you should consider hiring a lawyer for your startup:
Incorporating a startup creates a legal separation between the business and its founders. Through incorporation, your business can manage its affairs as an independent entity, including employing talent, entering into contracts, paying taxes, and holding intellectual property. A startup lawyer can help you decide on an ideal business structure based on your finances, plans, goals, and business/industry.
2. Employment Issues
As your startup grows, you may have to hire employees and contractors. Before doing this, you must acquire an Employer Identification Number (EIN) or Federal Tax Identification Number from the Internal Revenue Service (IRS). You must also conduct due diligence to ascertain that non-compete agreements don’t bind your employees. Determining whether your employees have legal work authorization to work in the U.S. is also necessary.
A startup lawyer can help you with the above issues as well as draft employment agreements that cover intellectual property matters, non-compete clauses, and confidentiality obligations. They can also guide you when classifying staff as independent contractors or employees to avoid employee misclassification penalties by the IRS.
3. Intellectual Property Protection
Innovative concepts or inventions are what fuel many new startups, particularly in the tech sector. Needless to say, protecting your business ideas is crucial. If the invention is patentable, an intellectual property lawyer can help you with all relevant applications. A lawyer can also draft confidentiality agreements for you to enter into with parties you intend to reveal your ideas to, including co-founders, business partners, advisors, and employees.
4. Regulatory Compliance
It is the duty of a startup lawyer to help you identify all the specific regulations for your business and industry and provide advice on compliance. They can also inform you about the legal ramifications associated with non-compliance with laws such as securities and intellectual property laws.
Capital is the lifeblood of any startup, and founders typically think about securing funding to run the business from day one. If you decide to bring in outside investors, your lawyer should ensure you get the best possible deal, whether raising from venture capitalists, angel investors, or even through crowdfunding. A startup lawyer can also advise on the funding structure you should opt for — debt or equity — and the potential long-term effects of your decision.
Other reasons why startups need attorneys include:
- To identify risks
- To protect a brand’s identity
- To generate website documents, such as user agreements, and deal with data privacy issues
- To issue stocks to co-founders, employees, independent contractors, advisors, and directors
- To comply with SEC regulations
- To manage their cap table
Our Services for Startups
Startups have unique needs, and Fridman Law Firm aims to provide founders and company owners with the help they are looking for. Our attorneys offer assistance with key issues affecting startups, including:
- Business entity formation
- Sole proprietorship
- Limited liability companies (LLCs)
- Capitalization strategy and cap table management
- Shareholder agreements
- Founder agreements
- Equity financing and venture debt financing
- Private placement memorandums
- Term sheet preparation and negotiation
- Financing documents
- Friends and family >> SEED >> Series A, B, C, D etc. >> Exit
- Convertible notes
- Simple Agreement for Future Equity (SAFE)
- Subscription agreements
- Filing Form D with the Security and Exchange Commission (SEC)
- Compliance with the state “blue sky” laws
- Employment and independent contractor agreements
- Technology and internet law
If you are just beginning operations, you should get help from startup lawyers with relevant knowledge and experience in business formation to provide the advocacy, advice, and services your fledgling new company needs.
Get Help From a Business Startup Lawyer Today
A new venture requires lots of work. Sometimes, it may feel as though there aren’t enough hours in a day. If you decide to build a business, you should partner with a lawyer with knowledge and experience in business law to provide you with the legal support you need. Fridman Law Firm is ready to help you understand your rights and obligations as a business owner and advise you on critical legal issues and loopholes you need to address.