The following is a guest post by Taylor Johnson. Johnson is a business expert at LegalTemplates.net, a legal documents company that strives to simplify the complex world of law and business for everyday people.
Entrepreneurs run into a lot of legal risks when starting a new business, but by following these solutions, they can triumph over any obstacle that comes their way.
Are you an aspiring business owner? The thrill of operating your very own business can propel you to personal and financial rewards if you keep a positive attitude and persevere. The reality, though, is that you will also run into a host of challenges when you first start out, and you will need much more than a good attitude if you want to remain prosperous for years to come.
Although it’s impossible to predict what obstacles a new business will experience, without a strong legal structure, your business is exposed to personal liability that can cost you all the way to court. Understanding these mistakes is the first step to avoiding them.
Mistake #1: The business is not incorporated.
If you want to take advantage of a state’s tax and legal benefits that are given to businesses, you need to separate your business into its own entity. If you do not, the state will assume that you are the sole proprietor and your personal and company assets are joined. This can spell disaster for you if you were to run into business debt. In the worst case, a creditor can go after both your personal and company assets to settle this debt.
Incorporate your business. An articles of incorporation not only minimizes your company’s taxes, but you would also gain the liability protection you need.
Pros of incorporating a business:
- protects the owner from the corporation’s liability
- ability to raise capital through the sale of stock
- provides employees with the opportunity to buy stock
- establishes a clearly defined business structure
- easier to transfer ownership
- potential tax savings
- may give your business more credibility
- corporations can have unlimited life
Fun fact: about half of public corporations actually choose to incorporate in Delaware and Nevada to save taxes. You should look into to it.
Mistake #2: No one signs a non-disclosure agreement.
One of the most valuable assets to a company can be their intellectual property (IP), and there are many case studies of new entrepreneurs failing to protect their IP and suffering some pretty bad consequences.
If you do not take the security of your IP seriously, there is nothing stopping someone else from making money off of your once-in- a-lifetime idea or confidential information, and you will have no legs to stand on in court when they do.
Sign a non-disclosure agreement with business partners before discussing your company’s intellectual property. This document allows you to establish what assets are most valuable to you and gives you legal leverage if you ever had to go to court.
Non-disclosure agreements are commonly used when one or both parties have valuable confidential or sensitive information like trade secrets, customer lists, or proprietary know-how. In order to turn a great idea into cash flow, both parties consciously choose to share confidential information to explore a possible collaboration or business relationship.
Mistake #3: The business has no licensing agreement.
When it comes to intellectual property, there are even more ways a business needs protect it legally. Without the correct licensing agreements in place, the owner of the valuable IP would not be able to make money on IP or control how it is used out in the world.
If you do not set the terms of everything related to your IP and protecting your proprietary rights, it is possible for you to completely lose access to it. This could be a dire situation for someone who needs their IP to grow their business or make a living.
Draft a license agreement if you own a patent on a useful piece of technology, have a copyright on a popular photograph, have trademarked a special image, or own some other invention or creative work that you want to make money on. Licensing your intellectual property will open up your business to a whole new world of customers who can help fuel your future ambitions.
These are all possible scenarios for a company who does any amount of their business online. As a small business, these are definitely scenarios you would be smart to avoid.
Mistake #5: There is no certificate of stock.
At some point, a business owner might want to sell their company or one of the founders might want to leave. There are many complicated actions that need to be taken if these decisions are made. Without a certificate of stock, there is no proof of purchase or ownership of the business which can lead to chaos if there’s ever any dispute of ownership.
Draft a certificate of stock to serve as evidence that you or a stockholder owns shares of the business. This proof of ownership will guarantee shareholder rights, liability protection, and can even make it easier to get a loan on the value of the shares.
If you want to give up your business or have a dispute with a shareholder, a certificate of stock serves as a record that you owned the shares and allows you to sell your stock quickly if needed or settle any disputed ownership.