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6 ways entrepreneurs can hurdle common legal pitfalls

By ,
Rhonda Carniol
Rhonda Carniol

Starting a business is one of the most significant decisions anyone can make – one with potentially great upside. Walking that path, however, carries significant risk, and the first step should never be taken without consideration of what will make your business valuable.

Most important is determining your short-term and long-term goals, whether it be to create a family business, attract investors or implement a five- or seven-year plan and then hope for a sale. Most start-up founders aren’t fluent in legalese, but that doesn’t mean they can’t prepare themselves for the many legal pitfalls they may encounter on their path to prosperity. Here are six best practices entrepreneurs can employ to make sure they don’t get ensnared by common mistakes.

  1. Protecting your personal assets: While your business would not exist without you, in the legal world, it should exist as a mostly separate entity. From the earliest stages, any start-up should establish itself as a corporate entity, such as a limited liability company. The reason is simple: should things go south, your losses will be limited mostly to cash and other assets owned directly by the business. Personal assets – your home, car or retirement savings – are likely to be spared, even in the case of a bankruptcy filing or other abrupt dissolution.
  2. Put it on paper:  Business partners should put the terms of their arrangement in writing during the earliest stages — when everyone is excited about the new venture. If an agreement can’t be reached then, you are likely to encounter even more significant issues in the future. The process of entering into an agreement at the outset will also help you avoid disputes later, because of the conversations that occur in connection with finalizing such agreements, such as discussing how to resolve differences with respect to operating the business. Firming up a legal agreement early will help ensure you have the right group of partners (and possibly investors), and can let you avoid costly legal disputes that affect your business’ value and operations.
  3. Protect your brand – A brand is everything to a business – it’s what will get you noticed while your competitors toil in obscurity.  Consumers and businesses develop loyalty to a brand.  For example, without a logo on a bottle, could you tell which toothpaste you were squeezing onto your toothbrush? In the absence of the proper protections, however, these differentiators can easily be co-opted. An experienced intellectual property attorney can serve as a critical guide to obtaining trademarks for your company’s name, logos and designs. Similarly, they can determine whether your business’ products and services can be copyrighted, patented or otherwise protected. By doing this, you are not only protecting yourself – you’re adding tangible value to your business.
  4. Own Your Significant Assets – The assets of a business - whether they be intellectual property, real estate or inventory – should usually be owned by the company and not the owners, individually. Owners having the title to company assets can cause significant problems, particularly if the business is in the process of being sold off or raising funds. Interested investors can be scared off by the individuals owning the assets and any imbalance among owners could give one party leverage over their partners during a sale. Waiting to transfer assets may also potentially have serious tax consequences. Make sure that the company owns what it needs to operate its business or, in some instances, has long-term licenses to such assets.  Also, when entering into agreements with independent contractors, protect what makes your venture unique by structuring   the agreements so that you have sole ownership of the products developed by these independent contractors.
  5. Protect Confidential Information – A company’s confidential information often adds significant value to the business, whether it is a secret recipe or customer information. And in the consumer financial, health information and other business-to-business sectors, you will most likely have contractual and statutory obligations to protect the confidentiality of your customer information (as well as potential liability for breaches).  Therefore, it is important to have contracts with your employees, consultants and vendors to ensure that they protect confidential information.
  6. Consider The Source -  In today’s digital world, the beginnings of a new business almost invariably involve some form of technology, even if the business would not be considered a “tech” company. Entrepreneurs – particularly those whose code may represent proprietary information vital to their business – should be careful about using what’s called “open source” code or software. Using open source has its benefits - most obviously, it’s free and easy to utilize. For many companies, however, it can be of great harm to their overall value.  In some instances, what is developed using open source code is required to be shared publicly, which would include sharing it with your competitors. It is not uncommon for a company’s value to be diminished after a potential buyer discovers that the company has used open source to develop software that the company uses in its business — especially if the company’s business involves licensing this software.

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