6 legal aspects to consider for start-ups. From which contract template to use, to how to prevent disputes

Embarking on the journey of starting a company is thrilling; nevertheless, it can be an intimidating endeavor regardless of the industry an entrepreneur opts to enter. While entrepreneurs often concentrate on the advancement and expansion of their startups, cash flow and different product iterations, they commonly neglect the legal risks that their organization might encounter. Overlooking these issues can have a detrimental impact on the business’s success and expose it to litigations, which is why you can responsible start by using a proper template contract for your partners and clients and avoid most common mistakes.

We delve into some of the common legal hurdles faced by startups, with the goal of heightening awareness among entrepreneurs regarding these possible risks.

1. Failing To Choose A Suitable Business Structure

Setting-up a company comes with legal implications. Entrepreneurs frequently overlook the importance of selecting the most suitable business structure by taking account their specific needs. While limited liability companies (SRL) are the most popular and accessible form of company, they come with obligations related to the trade registry, fiscal statement, and internal organization. For somebody who has never dealt with companies before, it might seem intimidating to start operating your own company without external support from a professional. What is more, limited liability companies (SRL) do not allow third parties share transfer (let’s say, towards a potential investor), unless voted by the legal majority.

But because incorporated businesses tend to be more appealing to potential investors, this is the most used solution for startups. However, you cannot raise capital with an inefficient business structure or potential legal claims waiting to be filed against your startup.

For some entrepreneurs it is common to set up several companies and divide the activity in order to avoid taxes or conflicts with interest with the clients. Others may decide to establish the headquarters in tax havens or deduct as much costs as possible. All these might work on short time, but did you ever investigate the potential exposure in case of fiscal inspections?

Similarly, many small businesses use articles of association or template contracts procured from accounting firms or other non-legal professionals. It doesn’t take long into the performance until they find out how they are bound under a certain contractual term, without any possibility to terminate the contract or claim adjustment of some obligations, or figure that intellectual property or creations are not protected.

Nobody wants to repair the damage done over time to a business organized improperly and it is often easier to turn away from it.

To scrutinize another option, individuals authorized to operate as sole proprietors (PFA) or other partnership structures (even NGOs) may incur reduced setup and registration expenses. However, these structures might not effectively separate the entrepreneur from personal accountability concerning the business’s debts and liabilities. Choosing not to incorporate a company, driven by the belief that the incorporation process is excessively expensive or intricate, exposes entrepreneurs to potential personal liabilities later on and to limited options to attract external partners.

However, for some types of business, PFA would be a great choice. It might be the case for different professionals that can charge hourly rates or have multiple clients or work on project based models.

2. Engaging in Contractual Agreements Without Sufficient Legal Guidance

Regrettably, startup enterprises may enter into contracts without obtaining adequate legal advice. This often results in numerous subsequent issues that could have been preemptively avoided with appropriate legal counsel, leading to increased legal costs for resolution.

Startups typically operate on a constrained budget and a tight timeline, causing them to perceive hiring a lawyer as a potential delay to their operational efforts and an expensive endeavor, particularly with the traditional hourly billing structure employed by traditional law firms. It is simply not affordable and unrealistic for startups. It is why entrepreneurs may sometimes feel compelled to take risks and execute documents without legal guidance, just by using their experience and understanding of the matter.

From a business perspective, we have no objection. Any entrepreneur clearly knows their business better than attorneys and can put into a contract what they need. However, even the brightest and most successful entrepreneur not trained in the legal field can be mistaken. In many instances, they use template contracts either unfavorable to their business, or misunderstand the scope of some clauses, or forget to protect same rights or take into account potential developments. A solution for startups facing this challenge is to use our professional template contracts that have already been checked by lawyers or ask for an attorney who is willing to collaborate within the startup’s budget, adopting a flexible fee model that accommodates both parties sensibly.

3. Handshake Deals Are Not Legally Binding

Firstly, do you have a contract between the founding partners? You are now driven by the same desires to grow the business and common vision over the immediate future, but where will you be in 6 months? 1 year? 3 years? Nobody knows.

Disputes often arise regarding various aspects such as roles and commitments assumed between the founding partners, the conditions under which they are allowed to sell or leave the business, how they can use the business resources and many others. If left unresolved, these disputes can lead to unfortunate consequences, such as disrupting or even halting the business’s progress, alongside legal fees much higher than what it takes to download, for instance, a partnership agreement or shareholders’ contract.

They both enable partners to predefine essential terms that govern various aspects of the business, like buyouts, exits from the business, ownership structure, finances, voting control, and more. Moreover, engaging in the process of negotiating a contract offers partners an opportunity to thoroughly and honestly assess their roles and commitments to each other and to the business itself.

4. Neglecting the Safeguarding of Intellectual Property Rights

In conversations, everybody has heard about patents and trademarks, but many entrepreneurs don’t even know what intellectual property rights are meant to protect or how they can benefit the business. And it is perfectly understandable for people without legal training.

As a business startup brings its projects to fruition, the intellectual property rights - be they copyright, trademark, designs, patent, trade secrets, or rights over software - emerge as significant assets that demand protection. Unfortunately, startups often lack awareness of the necessary steps to safeguard these intellectual property rights, neglecting even the most basic precautions such as registering trademarks, or ensuring parties sign confidentiality agreements (NDAs).

In other instances, intellectual property rights are not adequately transferred through well-crafted template contracts that establish clear legal ownership, when the startup uses third party services such as developers, designers, content creator or other professionals. Save yourself from the disaster by using proper template contacts such as content creation contract, consultancy agreement, or service contract.

5. Failure to Comply with Employment Laws

Startups that hire employees should document the matter correspondingly. They often face challenges related to employment laws, and failure to adhere to these regulations can result in serious legal consequences. Ignoring laws governing hiring procedures, termination practices, working conditions, and employee rights may expose the startup to legal liabilities. This can lead to costly lawsuits, financial penalties, and damage to the company’s reputation, not to mention losing precious financing opportunities because employment litigations hang over your head. It is crucial for startups to stay informed about and comply with employment laws to foster a fair and legally compliant working environment, from the very beginning. Use a well-crafted employment agreement and internal regulation and seek legal assistance whenever things are heated with an employee. You can check in this article liability-related risks that employers might face for infringing the law.

6. Neglecting Regulatory Compliance

Some startups make the mistake of neglecting regulatory compliance, assuming that certain rules or regulations don’t apply to their early-stage operations. Wrong! This oversight can prove costly, as non-compliance may result in legal issues, fines, and reputational damage. Startups should invest time and resources in understanding and adhering to industry-specific regulations and compliance requirements. By doing so, they can avoid legal pitfalls, build trust with stakeholders, and establish a solid foundation for sustainable growth.