If you’re starting a business, every decision you make in the first phase of your company’s development is crucial for its survival. During this time, even the smallest errors can lead to liquidation. That’s one of the reasons why more than 90% of companies fail in the first three years after their incorporation. Legal mistakes are easy to make, and they can be harmful to your company’s development. In this article, we’re going to explain the five most damaging mistakes entrepreneurs can make.
This information is useful for both beginners and more experienced entrepreneurs. It can help beginners to avoid the most common legal mistakes, while more experienced business owners can use it to scan their company’s operations and avoid future legal mistakes.
Not protecting your brand
Patents and copyrights are some of the most important legal notions of the Western world. They allow its owners to protect their brand and products from theft and copyright violations. Many small business entrepreneurs forget to protect their brands, which allows other people to copy their product patents, their software’s source code or their company’s visual identity. This type of protection is especially important in the tech world because in software and web development, all source code is out in the open and anyone can use it to create the same or similar product and sell it on the market. Since many tech companies grow at a staggering rate, their products are very interesting to counterfeiters and intellectual property thieves.
Incomplete and imprecise contracts
Signing an incomplete contract with your clients may lead to customer complaints, more serious disputes and even costly lawsuits that can lead your company to liquidation. If your contracts are not precise, clients may expect a product or a service that you’re not able to get them. In that case, they will file a complaint, while some may decide to file a lawsuit for consumer fraud. These lawsuits can be costly and tiresome, and the best way to avoid them is to consult a consumer fraud attorney before making an offer and let them review your client contract drafts.
There are thousands of startups on the market, and many of them provide similar services and products and use a similar business approach and visual identity. You may not be aware that other companies have already patented the logo you’re using or the product you’re selling. That’s why before you even start your business, you need to conduct a thorough competitive analysis. It will also help you to make your brand stand out. Thorough brand clearance is another analysis that will help you to avoid copy infringement.
Choosing the wrong form of business
Many entrepreneurs dream big, and that’s why they often launch companies or LLCs when they can easily get away with a simple sole proprietorship. Still, both corporations and LLCs have some very helpful options. For example, they protect your personal assets from creditors. If you’re planning to reinvest your money into your company and avoid taking large business loans, a sole proprietorship is the business form you should choose. The form of business also defines how easy it would be to raise the capital and solicit investments. That’s why you should take your long-term goals into account when forming a business, but you also need to be realistic. Choosing a form of business is one of the hardest decisions entrepreneurs need to make before the incorporation, and that’s why it’s always a good idea to consult an attorney, who will thoroughly explain the advantages and disadvantages of every form.
Not creating the partnership agreement
Entrepreneurs often start businesses with their friends, spouses or co-workers. Even in this case, they need to put their partnership agreement in writing from the very start of their entrepreneurship project. Partnerships often go sour, and the only way you can protect your interest, in this case, is by sticking to the written agreement that defines the asset ownership. A written partnership agreement will also help you to sell your share of the company, in case you want to exit the business. Attorneys make this type of agreement, which covers the percentage of ownership each partner has, their investments and contributions, job titles and the decision-making process within the firm.
By far the greatest legal mistake an entrepreneur can make is not seeking legal advice from an attorney, when needed. Many business owners try to solve their legal problems in order to save money. Making difficult legal decisions on your own can cost you a lot in the long run. Most lawyers offer free consultations and they can give you advice on how to cut legal costs or keep your business legit. That’s why before every major legal decision, you should consult a specialized attorney who works in an appropriate legal field.