10 Big Legal Mistakes made by Start-ups

10 Big Legal Mistakes made by Start-ups

 

When an entrepreneur is looking to start his own venture, he is naturally quite excited, because it is a step towards the fulfillment of a long-seen dream. And being the ‘one-man army’ the entrepreneur has to do everything on his own – from finalizing the workplace, to finding the right people, and from planning the production to planning for sales and marketing. With so much on the plate, a person may miss out on some things, which don’t appear to be urgent at that time.

What are Legal Mistakes?

Research has shown that most of the time, the failure of a startup is due to the mistakes committed, which are related to legal matters. However, the nature of these legal mistakes is such that they are visible only after few years, by which the damage is done. Hence, it’s critical that an entrepreneur takes out some time and ensure all compliances so that these legal mistakes do not shatter his dreams.

Some Common Legal Mistakes:

While working towards setting up a startup, many entrepreneurs just get engrossed in operating issues and often overlook the legal aspects of the business. Some of the common mistakes made by start-ups are:

Legal Mistake 1.  Wrong legal entity:

The biggest legal mistake that an entrepreneur does is not choosing the correct legal entity. While making his company, an entrepreneur has several options to choose from. Depending upon his situation, he needs to choose the structure, he deems the best. The right decision is very critical for the success of a start-up.

The correct form of a legal entity helps you in several ways in the future. For example, if you don’t want to take on the burden of the company’s losses/liability on your head, then it’s better to go for LLP or a limited company. This structure is preferred while dealing with foreign clients.

Legal Mistake 2.  Not getting the company’s name registered:

Whatever may be the entity structure, it’s important to ensure that you have a unique name and no one can make a claim on it. Don’t forget to verify the name before finalizing the logo design, Mobile App or, printing business cards. Else this legal mistake may prove very costly.

Legal Mistake 3.  Not tracking expenses:

Another common legal mistake that start-ups make is not keeping a proper check on their expenses. The employees are so engrossed in their work, that they don’t file all the expense slips, invoices, receipts, etc. And when the time comes to do the audit, they search here and there. Very often they miss out on expenses, for which they could have got tax benefits. This leads to start-up having to pay higher taxes. To take care of it, the startup should consider hiring an accountant.

Legal Mistake 4.  Not having a proper founder’s agreement:

In the optimism of becoming a successful entrepreneur, many people end up getting overconfident and commit a legal mistake. Just like any other business, your startup may also have up and downs. Hence, it’s important to decide in advance how they will face failure. This makes it critical to have a foolproof founder’s agreement containing all essential clauses, such as adjudication rights, liabilities, and responsibilities of each founder.

Legal Mistake 5.  Mixing revenue and capital expenses:

Another common legal mistake that most startups do is not being able to differentiate between revenue expenses and capital expenses. This is because both the expenses are treated separately in the balance sheet and have different tax implications.

Any expense wrongly booked, may give a wrong signal to the tax authorities. They may not approve some expenses and this mistake may prove fatal.

Legal Mistake 6.  Inadequate protection of intellectual property:

In today’s competitive times, all startups look to have some kind of competitive edge over others. For a startup, having some kind of Intellectual Property (IP) like copyright, patent, or trademark can be the most valuable asset. The startup should sign strict non-disclosure agreements to ensure that no one is able to make a claim on it. Startups, which make a legal mistake of overlooking this, end up repenting later.

Legal Mistake 7.  Missing regular tax payments:

Payment of taxes regularly and that too on time is mandatory. Startups must determine the tax for the year in advance, and provision for it in advance. Non-payment of taxes may prove to be a costly legal mistake, as it may put your startup on the blacklist of tax authorities and make it ineligible for various government benefits.

Legal Mistake 8.  Not taking professional help for tax matters:

For a startup, tax matters can be a big headache, especially when the entrepreneur is focused mainly on growth. Hence, it makes tremendous business sense to hire a tax advisor to ensure compliance with all tax regulations.

Legal Mistake 9.  Not having a proper Non-disclosure Agreement:

While planning a startup, an entrepreneur tends to speak to a lot of people about his idea. The person shares his idea, which may be copied by others, even before the entrepreneur can do it. Hence, it’s important to have a proper confidentiality or non-disclosure agreement in place, when talking to people while hiring, getting advice, or applying for finances. A proper agreement will ensure that the information you share with others remains private.

Legal Mistake 10.  Infringing a competitor’s Trademarks:

While starting a new business, one should ensure that your brand name or trademark is distinctive and clearly indicates your identity. Hence, the entrepreneur must conduct a search before deciding on a trademark of the firm in order to avoid using a trademark that is already owned by another.

After all, you wouldn’t want to commit a legal mistake, where you put in a lot of money and effort only to realize that you don’t have enough rights to do that. This would mean wasting all investment.

Conclusion:

A startup idea can be both exciting and challenging. While every new startup has growth potential, there is also a possibility of making legal mistakes. Most of these mistakes are legal in nature and may prove very costly to a startup.