Five Legal Tips for Starting Your Business
So, clearly all of the things you need to know or consider when starting your business cannot be boiled down to a simple five-factor, Buzzfeed-style list. But we know attention spans can be limited, especially during the early stages of a business’ start. Therefore, we’ve done our best to highlight five particularly important areas (among the many potentials) that you really need to keep in mind while preparing to dive into the exciting darkness and unknown that is the world of the startup.
1. LLC or Corporation?
Both LLCs and Corporations will provide you with the limited liability protection that you will need when starting a business and taking on the potential risks of borrowing money or putting the public in danger through your whacky inventions. The major differences come in the form of ease of use, investor preference, and tax treatment by the IRS.
In general, LLCs are “easier to use” than corporations because they don’t require as many formalities in order to maintain the liability shield. For example, when you set up a corporation you must initially hold a shareholder’s meeting in order to appoint a board of directors, and then hold a board of directors meeting in order to nominate officers of the company. All of these steps must be recorded in meeting minutes, and these minutes must be assented to by everyone participating. This can all feel a little unnecessarily burdensome when the same 2 or 3 people will be the shareholders, directors, and officers of the corporation. But failing to take all of these steps (or at least show on paper that you’ve taken them) may result in you losing your liability shield, making the whole point of setting up a corporation in the first place pointless. LLCs, on the other hand, allow you to do away with most of this unnecessary formality and manage the company in the way you want it managed (as informal as that may be).
On the other hand, if you will be seeking investment from outside investors that aren’t your cousin Bob, a corporation is probably your better option. This is because professional investors tend to prefer the corporate structure and requirements due to them forcing predictability in the business they are about to invest in.
If you would like to read more on the differences between LLCs and Corporations, check out our more in-depth article here.
2. Independent Contractors
Each time you collaborate with another creative professional to work on a project or “sub-out” some aspect of the project, you’ll want to use an independent contractor agreement in order to mitigate the risk of a “he-said-she-said” situation occurring. An independent contractor agreement specifies what services the third party collaborator will provide, how long the project will last, and how much you will pay them. It also ensures that you will exclusively own any work the contractor creates as part of the project and prohibits the contractor from delegating work to another party unless you agree. Moreover, the agreement legally protects you in case the third party discloses any confidential client information. As you can see, it’s an important document. We work with clients to create a template version they can use and tweak for each project.
More on how to utilize Independent Contractors here.
You’ve heard of them, but aren’t quite sure how they work. Or maybe you have a good grasp of their purpose, but are unsure as to how to go about actually securing one. Regardless, trademark protection doesn’t have to be as confusing as you think it is.
A trademark’s most basic purpose is to protect the hard work you put into building up brand loyalty, recognition, and goodwill in your business or its products and/or services. When you start using a unique name (that isn’t just a descriptive word, such as “Yoga” or “Leather”) or logo to describe your business, or its products/services, you automatically obtain what are known as “common law” trademark rights in that name or logo. These rights aren’t ironclad, however, and if someone has been using the name or logo before you, their rights will trump yours. Additionally, your rights are geographically limited to the area(s) in which you are actually selling your goods or performing your services (at least until you obtain a federal trademark registration). This means that someone could technically start using your exact name or logo on their products/services on the other side of the country and be perfectly within their rights to do so.
The possibility of something like this happening is why, if you are serious about protecting your name or logo, it is important to lock down a federal trademark registration early. An additional reason to look into federal registration at the very early stages of your business is the possibility that you might be infringing on someone else’s trademark. A good trademark attorney will offer to do a “clearance search” for you, which attempts to identify any conflicting registrations or other users before submitting your application. This allows you to decide whether to forge ahead with your trademark application, or whether to abandon your name/logo and rebrand before spending a heap of cash on something that will inevitably land you in legal hot water down the road. As the age-old advice goes -spend a little money upfront to save a lot of money down the road.
4. Written Agreements (Most Importantly: Creative Services Agreements)
We know, you’ve been friends for years and you’ve worked together at various companies. What could go wrong!? Nothing, right? Actually, there are a scarily large amount of things can go wrong, and if your startup becomes wildly successful, chances are extremely high that things will go wrong. It is crucial that you work with an experienced attorney to draft the appropriate agreements to document the rights, equity, and relationships between you and your cofounders. Not doing so opens you up to so many headaches that could have easily been avoided had you taken a little more time to put things in writing. It’s also one of the biggest 2020 hindsight areas attorneys deal with – when the proverbial excrement hits the fan, former friends curse themselves for not having these important agreements in writing and thereby saving a couple thousand dollars in legal fees trying to unravel a “he said, she said” mess. So, here’s some sarcastic and terrible advice – save a struggling lawyer; never put anything in writing (note in case you skimmed this section: do not follow this advice).
Calling all creatives, artists, and freelancers – you’ll want a contract in place for every project you work on or client you provide services for. This is crucial. A creative services agreement defines the project scope and identifies the parties’ duties, goals, payment information and any project timeline or milestones. These agreements specify how many “change orders” you are willing to work on before the client will owe you an additional service fee. You can learn more about CSAs here.
5. Getting Investment Right the First Time – It’s Not The Wild West
What do we mean by the Wild West? We mean that you cannot advertise and raise investment funding for your startup with a simple handshake and smile. Sure, your smile can brighten the room, but it won’t protect you from a lawsuit if your investor doesn’t see the return on investment he or she expected to see. Furthermore, the Wall Street debacle and housing-market crash in our recent history spawned an incredibly strict and complex legal framework that only qualified professionals can really understand and navigate. Upfront investment in getting things right is well worth the protection as your business grows, and certainly worth the protection if your business fails. Here’s a little fact to scare you straight – messing up the first investment can and will cascade down every subsequent investment you secure, meaning even if you did things right the second, third, and fourth time, it won’t matter an inch because of the failure to get the first one right.
A little primer on the many ways to raise money for your fledgling business is available here.
Starting a business can be a confusing and scary time for many, particular the first-timers. The best thing to do is read and understand as much as you can before talking to a professional. That way you’ll save both your time and theirs, as every interaction you both have will be based on a mutual understanding of the goals, objectives, and even terminology involved.
By: Kieran de Terra, Esq. – 01/22/17
Disclaimer: Although this article may be considered advertising under applicable law and ethical rules, the information in this article is presented for informational purposes only. Nothing herein should be taken as legal advice and this content does not form an attorney-client relationship. If you would like further information, Wilkinson Mazzeo would love to hear from you, so please feel free to reach out with any questions!