Legal Mistakes Founders Make When Starting Up A Business

Litigation isn’t the only business risk as there are a lot of possible issues as regards to legal oversight made by founders of a business. From the onset, when a new business is in the pipelines there are a lot of documentations that should follow to ensure that the business is free to run, has limited risks, has a defined structure in terms of ownership and contributions by stakeholders and sources of funds. A lot of modern businesses run into various company conflicts, both internal and external especially when the structure and documentation isn’t pre-decided.

The cost of setting up legal documentation is often quite pricey and this leads to evasive measures by business men. This might not be the safest thing to do. It is usually better to avoid all intricacies at the onset because there are various complexities that can short-live the business.

The best legal decisions are first made by employing the aid of a legal consultant. There is usually a debate as to what structure is best when registering a business as they come with variable implications;

  • Sole Proprietorship

  • The legal documentation for the sole proprietor is limited as it’s generally a one-man business. All that is required are local permits and the tax on this system is considerably low. This seems like a great structure as only one person runs the business and all gains go to one person. However, there are various disadvantages to it such as;
  • Due to sole ownership it is difficult to form partnerships in cases where an external source of funding is needed.
  • A sole proprietor stands the risk of litigation by creditors since it’s a one-show. There is no company protection which usually is applicable to corporations and Limited Liability Company.
  • Limited liabilities and Corporations

In order to form an LLC or corporation certain state authorities must be involved. Appropriate documentation on state level is more expensive than sole proprietorship and partnership. This is a more complex form of business as the taxes are higher and requires proper accounting strategies.

The advantages of the LLC and corporation are tremendously higher than others and are as follows;

  • Protection from litigation by business creditors
  • Great savings on tax rates due to flexible deductions and other exceptions
  • More flexibility in partnering with other companies and ease of raising funds for capital
  • Partnership

this form of business is owned by more than one entity. The business recognizes each entity as a signatory and all forms of income are distributed within the partners by level of percentage of ownership. The downside of partnership is that the partners bear the risk of litigation by creditors.

For businesses that were built on collaborative efforts of two or more partners there are also legalities that must be tackled in order to maintain transparency and to check future disputes. Co-founders often need to decide upon numerous issues, decide roles and distribution of dividends. Here are a few agreements to put in place when operating a business with co-founders;

  • What is the percentage of ownership allotted to each co-founder
  • What specific roles do co-founders play and what are their limitations
  • What are the terms and conditions on buying and selling of shares in a situation where a co-founder wants to leave the company and how much would shares go for?
  • What sorts of commitment is required from co-founders in terms of financial implications and functions
  • Are there disparities in interests or goals for the company amongst co-founders
  • What is the method of conflict resolution between co-founders
  • How is inflow distributed amongst co-founders and how is it regulated to avoid conflict
  • Is there a policy that allows the removal of a particular co-founder who is underperforming of has committed an offence that puts the image of the company in jeopardy, and if there are, what is the possible compensation for the co-founder after dismissal?
  • Finally, how are decisions made? By voting? Does any co-founder have ultimate right and power based on contribution to the company?

Every startup company would have to put into consideration laws and policies that would guide employees. This is usually a problem for most companies; not enough laws. This is usually called employment documentation which is usually handled by the human resource department. Some necessary employment documentations to have in order to be able to manage employees effectively are;

  1. Employment letter signed by the authorities stating the offer and remuneration and terms of termination.
  2. An identity form to ensure that employee is legally able to work and can be properly identified

An employee handbook which contains confidential company information to be adhered to, tax information, company benefits, such as insurance, health and promotions.