Nasir Pasha, Esq.

The Three Worst Legal Mistakes Startups Make

The worst mistake, of course, is never getting started.  That enterprise (a) takes forever, (b) never makes a nickel, and (c) teaches you nothing.  So, make your best plan and jump!  That’s business advice.

Well, now that you’re mid-air, let us offer some legal advice.  The three worst legal mistakes are really the result of two factors – overconfidence and extreme thrift – two characteristics that define nearly every entrepreneur.  You are not alone.   Nonetheless, a softer landing is better than a harder one.  Anyway, back to the terrible three.

Coming in as the third worst legal mistake, drumroll, please……….

Legal DIY

Many sad stories begin with a boilerplate form someone found on the internet.  Perhaps it’s a non-compete agreement, or a sales agreement with incomprehensible provisions about dispute resolution, or a cheap way to incorporate.  This is not just nuisance paperwork you have to plow through, so you can get back to work. These documents can cost you a lot of expensive litigation.  You would be much better off getting some legal advice at the outset, rather than having to defend yourself on the backside of a bad deal. Part of the problem is finding a lawyer who you trust to act as a business ally. Interview until you find one, and then see if you can’t negotiate a flat fee structure.

The second worst legal mistake is ………..

Ignoring Intellectual Property Law

Particularly at the beginning, your most valuable assets may be your business identity and your unique product.  Federal trademark registration of your business name and any other important branding elements is important to protect your business identity and the goodwill you have built up.  Patent protection can be more expensive and takes a longer period of time, but if your business is built on a unique product, it is probably worth starting the process, at least to notify potential competitors that you intend to defend your exclusive right to use and sell it.

And the very worst legal mistake startups make, the baddest of the very bad, is …………………

Failing to Incorporate

Failing to make any choice about the form in which you do business means that you are a sole proprietorship. Most businesses begin this way, but don’t let it go on very long because it exposes you to unlimited liability for the debts of your business.  You could lose everything, including your home.  Doing business with a partner in a general partnership may make things worse because it exposes you to unlimited liability for your partner’s actions as well.  Consider whether some form of corporate organization, if not as an LLC, then a C or an S corporation might suit your appetite for risk better.  As above, this is not a do-it-yourself project, so spend some time and a little money with an attorney or an accountant.

There you have it.  As your business grows, new challenges will appear.  Hiring employees or working with independent contractors, for example, will add a new set of complications.  However, if you’ve gotten some decent advice and taken the initial steps to protect your business identity, your product and your personal assets, you’re off to a good start.

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