Common Legal Risks Startups Should Avoid

8 Common Legal Risks Startup Founders Should Be Aware of and Avoid

Has this happened to you?

You’re talking about your startup to family, friends, and maybe some people you might marginally call acquaintances. And in the middle of your passionate description of your idea, someone says, “That’s quite a risk you’re taking.”

Of course, you’re taking a risk! There are very few business startups around today that are guaranteed to succeed. Every time an entrepreneur starts a new business, they’re taking a risk.

But guess what?

Your entrepreneurial journey might entail a certain amount of risk, but there are certain legal risks of starting your business that you can deal with right now while your new business is still in its fledgling stage.

The key is to be proactive. So, where should you start? Don’t worry. We have you covered.

Here 8 common legal risks startup founders should be aware of and avoid:

1. Not Registering Your Business

Before registering your business, you need to know what type of business structure will be most suitable for your startup. Start with where you see your startup going, do the research, and consult with a business expert if necessary.

Whether you decide to incorporate or figure out that an LLC or partnership will work best for your needs, registering your startup is one of every entrepreneur’s most important first steps.

And, while you’re at it, don’t forget to assemble any necessary supporting documents. It will just make your life all that much easier later.

2. Not Securing Required Licenses & Permits

Getting the proper licenses and permits for your startup venture may not be the most exciting to-do on your list, but it’s a task that needs to be completed.

The risks of not having the appropriate licenses and permits can range from a fine to the actual closure of your business, so despite the mundane-sounding nature of this particular to-do, it’s right near the top of the “essentials” list.

All manner of licenses or permits may (or may not) be required for your venture, so some elbow grease in the form of research will be needed to find out exactly what you need to apply for – and when.

If you’re in a time crunch, this is where an expert business adviser experienced in your industry may come in handy.

3. Not Protecting Your Intellectual Property

If your startup is based on an invention or a unique production process you’ve developed, you’ve probably already taken the first steps to obtain a patent. But did you know there are other supporting assets you could be protecting?

For example, you’re developing your brand, so it’s a good idea to look into registering your trademarks. And if your startup is based on creative properties such as screenplays or books, then the Copyright Office should be your next stop.

4. Not Getting The Right Insurance

Basic business insurance is one thing, but if you want further peace of mind, many other important examples of coverage would make a good addition to any fledgling firm.

Product liability insurance is essential for manufacturers for obvious reasons. It ensures that legal costs associated with any damage caused by the items you produce do not threaten your business’ long-term prospects.

Professional indemnity insurance shields you from claims made by customers or clients relating to everything from contractual issues to professional negligence.

Vehicle insurance is required for any car, van, or truck you operate in a business context. Remember that the insurer needs to know the commercial use of a vehicle for this type of policy to hold water.

Because business insurance premiums can be costly, you’ve probably already grappled with whether you can safely wait to obtain insurance. But the whole idea of insurance is that it exists to deal with potential risks, and the nature of a risk is that it’s a risk.

In other words, risks can exist even at the start of your business journey. And since there’s no such thing as insurance after the fact, you want to get the right business insurance before you need it.

5. Not Keeping Confidential Information Secret

Many new businesses don’t have the funding initially to hire the needed staff. If this is your situation, and you’re looking at filling your HR gap with independent contractors and the occasional consultant, it’s important to protect your trade secrets with a nondisclosure agreement, also known as an NDA.

And, while you’ve got NDAs on your mind, it’s a good idea to examine each of your startup’s business relationships to see where else it might be appropriate for you to obtain signed NDAs.

For example, if you’re floating some confidential information in your business plan, a business plan nondisclosure agreement might be just the thing you need.

6. Not Optimizing Your Tax Benefits

Tackling your taxes as a business owner can be tricky, but with modern tools and guides for smaller firms, it is easier than ever. Perhaps the most important aspect to grasp is deductions since knowing what you can claim will help you manage your tax obligations more effectively.

From claiming vehicle-related deductions to taking training costs into account, there are myriad ways to squeeze more out of your finances by keeping track of your deductibles so that you are prepared when you or your accountant next submit your tax return.

Also, remember that if you fail to hit deadlines for filing or do not pay what you owe on time, you will be subject to fines and other penalties.

7. Not Securing Funding Safely

Getting together the money to catapult your business into its intended marketplace is a challenge in its own right, but you also need to be aware that there are risks involved with sorting out your funding in the first place.

If you take out a business loan with a bank, for example, there are obligations that you need to meet to avoid defaulting or overstepping any limitations included in the terms and conditions.

If you get private investors onboard, you need to both court the best people for this purpose and also make sure you know what you are committing to by taking their cash; do not sell off large chunks of your business without realizing the repercussions.

8. Not Choose Co-Founders Carefully

Having someone by your side to guide and nurture your small business so it can blossom into something special is often worthwhile. When selecting co-founders for your next entrepreneurial endeavor, being open, honest, and always on the same page about defining issues is essential.

From security and privacy policies to working hours, legal commitments, and disaster recovery planning, co-founders should be vetted thoroughly to avoid any future consternation.

Final Thoughts: No Risk. No Reward. 

Starting a new business is risky enough on its own. Why let those risks multiply? By addressing some of the more common legal risks startups face, you can at least take control of factors that can be controlled.

And that can spell more peace of mind and less stress: A boon for any entrepreneur.


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Disclaimer: This article is not legal advice. Any views or opinions represented in this post belong solely to the author. While every reasonable effort was made to ensure the above information is accurate, UniTel Voice, LLC. does not guarantee that this blog post is accurate and up-to-date. UniTel Voice, LLC does not accept responsibility for any loss, damage, or legal action incurred by your company due to the information in this blog post.