Insights
Must-Ask Legal Questions for Startups and Businesses
By Melody Yuan
To avoid red tape and protect your business, get your legal house in order early.
Imagine coming up with a design statement that would revolutionize your retail brand and make it more recognizable. After months of pitching, manufacturing, and distributing, the design is stitched onto thousands of pairs of shoes, with considerable money poured into marketing campaigns. Everything is going well, until another brand blatantly imitates your design and sells the same pair of shoes for less than half the cost of yours. Not only has your brand identity now been hijacked, the value of your shoes has plummeted. What’s worse, despite having your design as the registered trademark, the other company claims that it has the right to sell a look-alike of your shoes. This was an actual legal battle between Adidas America Inc. and Payless ShoeSource Inc. that began in 1994 and eventually resolved seven years later with a $305 million payout to Adidas.
While the example above was fought between two major corporations, many of these legal battles unfold every day with much smaller businesses. Each lawsuit and legal battle can last for many exhausting years, causing business owners financial grief and added stress to their lives.
Legal consideration is a no-brainer for any business venture. So, why do many businesses sue or get sued, and what’s the best way to protect your business? Instead of depending entirely on your legal adviser or lawyer, business owners can arm themselves with some basic legal knowledge in their line of business.
Legal structures and requirements change across various types of business entities, from limited liability companies, to sole proprietorships. The complexity of simply absorbing and understanding everything from liabilities to taxes can leave many business owners overwhelmed. To help narrow down the legal jargon to the important factors, we discuss some of the most frequently asked questions and concerns raised by business owners to lawyers.
What do you need to know before starting a business?
“As a startup, what’s important is figuring out what you need legal services for,” says Amy Wan, founder and CEO of Bootstrap Legal. “Whether it’s to protect an idea, or to negotiate a merger, you’ll need a good legal expert to help you navigate certain situations.”
Lawyers can assist in everything from drafting legal documents, to shedding light on how to file your business’ taxes correctly. To maximize time and money spent, prioritizing legal matters is paramount—especially for startups.
“There are a few questions you need to ask yourself before starting a business,” says Sam Mollaei, Esq., business lawyer for entrepreneurs and founder of Mollaei Law. “These are fundamental and can help you save money and time in the long-run.”
What type of business are you?
To make sure you have the coverage that fits your needs, business owners must identify whether they’ll be operating as a sole proprietor, an LLC, a C-Corp, or an S-Corp. While most of these business forms can be found online, Mollaei stresses the importance of knowing the difference between each, since aspects such as tax filings and contracts will be applied according to your business form. The most common business form for small businesses is an LLC, as it separates personal assets from the business. The C-Corp is typically filed by larger businesses that have investors and ambitions to go public. This form also is the most heavily taxed by the government. The S-Corp works closely with the Internal Revenue Service (IRS) and eliminates the government income tax.
Once the business form has been decided, “you must get an Employer Identification Number (EIN) with the IRS, open a bank account and create an operating agreement,” says Mollaei. Registering and keeping in compliance with the city or county that you will be operating your business in is also imperative. “These things lay down the foundation for a successful business,” says Mollaei. “It’s always better to consult with a lawyer early on in the game, if you’re ever unsure.”
What contracts does your business need in order to cover all grounds?
Although there is no straight answer to this—most of the contracts drafted are specific to the business—Mollaei suggests looking at contracts in terms of relationships: “Do you have clients? Will you be dealing with vendors? Who you’ll be interacting with will determine what contracts you’ll need.” With any business agreement, both Wan and Mollaei emphasize the importance of having everything down in writing. “When you’re in court, the only thing that holds true is written documentation. It’s hard to prove a case of he-said, she-said,” says Wan. While there are many online legal services such as LegalZoom with ready-made contract templates available, Mollaei warns that these contracts may not cover everything needed for your specific business. “I can’t stress this enough,” says Mollaei. “Stay away from online contracts. Make sure you have an actual lawyer look through all your legal and written documents. It’s easy to take the cheapest route, but it’s best to pay your dues upfront so you don’t end up with a lawsuit later.” Mollaei also recommends having written disclaimers on your digital platforms and stores, such as the terms of service and privacy policy.
When do you trademark?
Finally, getting the right timing to trademark your business can be hard. Trademarking can be expensive in the beginning and an unnecessary expense if the business has not yet started to take off. Mollaei believes that businesses don’t need to register a trademark right away. Conversations on trademarking should happen once the business has launched and is running. Trademarks are tagged to the brand, and the cost depends heavily on the making of the trademark and what it will be used for in the future. “Trademarks usually go for a few thousand dollars annually,” adds Mollaei.
How do you avoid running into legal issues?
In addition to financial, inventory, operations, staffing and a few hundred other issues, the last thing business owners would want is to have a legal hiccup.
“The biggest legal issues always emerge from a compilation of small and neglected legal hiccups,” says Mollaei. Having worked extensively in the field, three things immediately come to his mind as the most common legal issues.
- Lack of written contracts
- Forgetting to provide clients with a term of service
- Filing business taxes incorrectly
“Not having everything written up initially, especially when it comes to partnerships, is a common issue,” he says. Regardless of whether or not you trust your business partner, having a written contract to outline the parameters of the business, from ownership to resolving disputes, should be prepared and signed by all parties involved.
Written contracts extend to clients, as well, in the form of a term of service, since you never know when a client may decide to sue or sabotage your business.
Finally, having the right accountant to file taxes is paramount, as legal issues involving the IRS can get messy and even result in dissolving your business.
Given the number of businesses that fail as a result of poor financial and legal planning, Mollaei and Wan stress the importance of investing in experts who can help you navigate difficult processes. Of course, an Internet search can provide basic answers, but having a person to discuss and prepare documents with is the most secure method of ensuring success, according to legal experts.