Starting a business can be both exhilarating while simultaneously scary. You likely put a tremendous amount of time and effort into getting your dream project off of the ground but in doing so, you may have run into several challenges. Read on to avoid common mistakes associated with newly established businesses.
Form of Incorporation:
Knowing what type of legal entity to establish is crucial to how your business will run going forward as it will change the way the business is seen through the eyes of the law. Failing to consult an experienced attorney before identifying the proper business structure for your company could result in higher taxes, limits on growth potential and creating significant liabilities.
In California, there are many different business structures that can be established, including:
- General Partnership
- Limited Liability Partnership
- Limited Liability Company
- Sole Proprietorship
It is imperative that all initial founders of the business agree on matters pertaining to the business. Such an agreement should be memorialized in what is known as a "co-founder agreement." Co-founder agreements can address some or all of the following:
- Goals of the business
- Who owns what percentage of the company
- The roles of the founders
- Protocols if a founder leaves the company
- Salaries of the founders
- Protocols for day-to-day decision making
- Protocols to remove a founder from the business
- How a sale of the business would be handled
Employees vs. Contractor:
Do you know the difference between an independent contractor and an employee? Classifying your workers correctly can make all the difference in operating a successful enterprise.
Independent Contractor: An independent contractor is a self-employed individual who has a written contract with your company to perform services for a fee. Usually, an independent contractor will use their own tools and equipment and can perform the work when they want, even if it is outside of your normal business hours.
Employee: An employee is a person who works for your company in exchange for wages. Your company is permitted to provide instruction, rules, and guidance over the employee and provide the employee with the equipment necessary to complete their job function.
Most people who provide services to a company are deemed to be employees, however, many companies prefer independent contractors due to the lower overhead costs. Generally, employees are considered more expensive because employers must comply with wage and hour requirements and more stringent employment laws.
Having said that, a company may not simply classify workers as independent contractors to avoid the strict employment laws. There are specific tests to determine the proper classification of workers, and it is important to comply with these requirements. The legal and financial consequences of misclassifying employees can be severe.
The Securities and Exchange Commission is a federal agency that facilitates capital formation and maintains fair, orderly, and efficient markets.
When it comes to a startup, certain exemptions exist that enable growing businesses to pinpoint investors and/or workers that will perform tasks in exchange for equity in the company. Some of those exemptions include:
- Section 4(a)(2): allows for transactions by an issuer not involving any public offering
- Rule 506 of Regulation D: allows companies to raise an unlimited amount of money
- Rule 701: exemption for compensatory equity issuance
Securities laws usually require that the sale of shares comply with certain disclosure, filing, and form requirements unless the sales are exempt. If a business does not abide by those laws, significant criminal and financial penalties for the founders will likely be the result.
Having an experienced lawyer can be extremely beneficial in this area since a specific and narrow agreement can ultimately shrink the amount of potential exposure.
If your business is centered around a unique service or product, you need to protect the intellectual property of that service or product. Intellectual property refers to creations of the mind, such as inventions; literary and artistic works; designs; and symbols, names, and images used in commerce.
Intellectual property can be protected by way of:
- Confidentiality agreements
Startups are ripe targets for litigation mainly because they don't know what they don't know. There is a lot of red tape to get through when starting a new business and you need to know the important steps you must take to stay in compliance with California and federal laws. A highly-skilled and vigilant business and employment lawyer can help protect your company from a myriad of claims and allow your company to focus on what it does best. For qualified and competent legal representation contact Mohsen Parsa today.