15 Expensive Legal Mistakes Made by Startups

There are many legal mistakes made by startups. If you had to name one legal mistake that you made in your new business, what would it be?

To help you avoid making costly legal mistakes in your startup, we asked lawyers and small business owners this question for their best insights.

From having no website policies to seeking out unspecialized legal counsel to postponing founder agreements, there are several common legal mistakes for you to avoid in the future.

Before we get to the list of 15 expensive and most common legal mistakes made by startup founders, watch this video to learn the biggest legal problems to avoid in your business (and don’t forget to subscribe to my YouTube channel too!)

Below are the 15 expensive legal mistakes made by startups and entrepreneurs (avoid these!):

Table of Contents

1. Not Having Website Policies

One common legal mistake made by a new startup is having no website policies. As a lawyer and entrepreneur myself, I see many startup businesses forgetting about how to make their website legally compliant. This results in problematic legal mistakes.

Your site is likely to have many different types of content and visitors, so you need to think about what you want to allow and disallow on your site. Without clear website policies in place, you are inadvertently opening yourself up to legal trouble.

There are three website policies you need:

A Privacy Policy that informs the people who visit your website WHAT information you are collecting from them, and HOW you are going to use this information. You are LEGALLY REQUIRED to post this policy on your website. Not having a proper privacy policy and maintaining consumer data results in all kinds of costly legal disputes and lawsuits.
A Disclaimer – this is the second policy you should post on your website to limit your legal liability for the content you share with the world.
Terms and Conditions – this is the third policy you should post on your website to outline your website rules and they form a legally binding contract between you (the owner of the website) and your visitors or customers.

Learn more about each website policy in this blog post or watch the video below! (don’t forget to subscribe to my YouTube channel as well)

Use this Starter legal bundle (prepared by a lawyer) to get done with all your website legal policies and protect your startup.

2. Seek out Unspecialized or Inexperienced Legal Counsel

One legal mistake startup entrepreneurs sometimes make is failing to seek out the correct legal counsel or law firms.

For sake of simplicity or to minimize costs, founders may try to contract with a single attorney instead of consulting with specialists in areas such as tax law, contract law, and intellectual property rights law.

While you may not need to retain lawyers in all of these areas of practice and commit to ongoing services with each, outsourcing and getting guidance from specialized professionals in the early stages of the company’s existence can ensure that the organization has a strong foundation and attends to the nuances of the laws and regulations in each category.

Michael Alexis, TeamBuilding

3. Remain Unaware of Your Tax Obligations and Tax Savings

Entrepreneurs will spend a tremendous amount of time structuring every aspect of their startup company, but often make the mistake of not placing much emphasis on organizing their tax obligations or simply don’t understand the impact of taxes clearly.

You should take the time to understand your unanticipated tax liabilities and tax incentives.

Businesses have varying tax rules, and those responsibilities only increase for Founders who often have different tax requirements than others.

Meeting with a qualified CPA to learn about an 83 (b) election filing, the required disclosure of share purchase amounts and distribution, and how those calculations will affect other filings with the IRS, is critical to protect both the business and shareholders.

By not learning and complying with tax requirements, confusion about what is income and what is capital gains can cause legal trouble that turns into a very costly mess.

You can learn so much from these best tax books as well.

Yuvi Alpert, Noémie

Use these time-saving tax forms to make your life easy.

4. Forget to Update the Terms and Conditions Annually

One legal mistake that I constantly see from startups, particularly in the digital space, is not updating their terms and conditions on an annual basis, especially on their websites.

This can pose a massive risk, especially if the startup stores and manages customer data. I would also recommend that if the startup uses third-party services, they ensure that the service is compliant with regional and international regulations.

You should also avoid these 13 worst website mistakes.

Mogale Modisane, ToolsGaloreHQ.com

Learn all about Terms and Conditions in this helpful blog post.

If you have no terms and conditions on your website or are worried that they don’t protect you fully, consider getting this template written by a lawyer that includes everything you need.

Also, find out how to protect your online course with the proper terms and conditions template (aka online course agreement) here.

5. Maintain Poor Documentation

Another legal mistake made by startups is not maintaining proper documentation.

The quick expansion of a startup might result in poor documentation of its agreements, contracts, and certificates, ranging from employment and vendor agreements to board and shareholder resolutions.

Proper documentation is especially crucial during mergers and acquisitions when investors request to study all of the company’s agreements, resolutions, certifications, and other documents as part of their legal due diligence to assess the worth of the purchase and its legal liabilities. Inadequate documentation may put off potential investors.

Veronica Miller, VPNOverview

Always use proper contracts like these in your startup to avoid making this costly legal mistake.

Related Blog Post: Freelance Writing Template You Need For Your Freelance Business

6. Fail to Recognize When to Incorporate (S Corporation, C Corporations or Limited Liability Company)

Thinking about legal mistakes made by startups, it is critical to know when your company is ready to incorporate.

Many people believe that the first step they must take is to incorporate. So much effort is spent putting out the documentation that there is little attention on the product or service that the company will provide.

Some discover there is no market fit by the time the company launches. Concentrate on polishing your mission first, and then incorporate. Others, on the other hand, do the opposite and incorporate too late.

In this situation, your firm is finally profitable, and you’re going to enter tax season, or you’re thinking about selling it. You incorporate far too late, and by then, you’ve been hit with legal fees and expenses you weren’t even aware of because you didn’t file all of the necessary paperwork at the same time.

To limit personal liability, a firm should incorporate it before executing contracts or hiring personnel.

Gerrid Smith, Joy Organics

Read this blog post to learn when to form an LLC for your online business/startup.

7. Use a Trademarked Name

One of the big legal mistakes made by startups is choosing a name that has already been taken.

This is one of the biggest legal mistakes made by startup companies. That’s because the startup founder or founders weren’t careful enough and didn’t realize that a particular name (or acronym) had already been taken. This obviously results in significant liabilities.

It’s a common legal mistake and it’s even affected a worldwide brand like WWE (formerly WWF until it had to be changed following a lawsuit).

It’s also happened to a group of Pittsburgh-based album reviewers on YouTube who had to go through the trouble of a rebrand after choosing an unoriginal name prior to launch. The lesson to be learned is that no one should set their heart on a company name without making sure that it hasn’t already been trademarked – even by someone else in a completely different space. Patent protection is a big deal and due diligence is essential.

Alan Ahdoot, Adamson Ahdoot Law

Here’s an ultimate guide on trademark law that startups need to avoid future conflicts, and you can schedule a call with a trademark specialist here.

8. Choose the Wrong Business Structure

As part of legal mistakes made by startups, sometimes when people are starting and building businesses, they do not pay enough attention to what kind of business structure they need to form.

For example, while a business may start off as a sole proprietorship, it may eventually need to be changed to an LLC due to hiring employees. It is very important to make sure that your business is registered with the right business structure.

This is one of the most critical legal aspects that you should consider during the initial formation of the business. Make sure to also have a proper LLC Operating Agreement in place that shows how your LLC is being run and managed.

Also, seek legal advice from a startup lawyer to make sure you don’t face legal challenges or major problems with your business later.

Drew Sherman, Carvaygo

9. Disregard the Need for an Emergency Fund

Another legal mistake in business to avoid is not having an emergency fund. Emergency funds offer a financial buffer that can keep you afloat in a desperate time of need without having to rely on credit cards or high-interest loans.

An emergency fund should cover three to six months’ worth of expenses, backing you up through financial hurdles to keep your business afloat at that critical start-up stage.

Hakeem Shittu, iPad Recycle

Here are 5 essential steps to managing your finances as an entrepreneur.

10. Fail to Secure Intellectual Property Rights

Failure to secure intellectual property rights is one of the most prevalent blunders made by entrepreneurs.

IP protection is really important for a unique product and should be considered in early stage of operation. “If the startup’s business is founded on an innovation, it should seek patent protection as soon as possible.” Filing for patent protection will not only inform the startup whether the idea is patentable, but it will also shield the innovation from infringement by competitors.

Other intellectual property concerns to consider include trademarking your firm name and investigating copyright issues with any material in your company.

Edward Mellett, Wikijob

11. Forget About the HR Department

In a sea of responsibilities, startup owners may overlook HR documentation. This is one of the common legal mistakes made by startups. As you grow your workforce, keep track of documents such as contracts, employee files, complaints, and compensation information. You’ll protect yourself and better serve your employees when you make HR a priority.

Even if you hire a freelancer, make sure to use a proper VA or freelance contract in place to protect your startup from legal liability and harm.

Ankur Goyal, Coterie

Read this blog post to learn about the 16 important legal contracts and templates you’ll need for your online business.

12. Disregard Creating a Business Plan

One legal mistake that startups often make is not having a business plan. Without one, it’s difficult for them to stay on course and grow as they should. They also need an exit strategy in case the startup doesn’t do well or needs funding; without this information, investors may be hesitant to put their money into the company.

Jar Kuznecov, Water Softeners Hub

Related Video: One of the expensive legal mistakes made by startups is facing ADA lawsuits – not ensuring their websites are compliant with this law.

Click the video below to learn more.

13. Postpone Founder Agreements

Another legal mistake made by startups is not using comprehensive founders agreements.

Entrepreneurs often disregard or postpone the crucial component of founder agreements in the excitement of launching a startup and tackling the challenges that come with it.

Founder agreements such as Partnership agreements cover vital grounds ranging from allocation of equity and ownership principles to essential responsibilities and salaries, etc.

These agreements also cover critical business aspects such as exceptional legal circumstances, norms associated with the possible sale of the business, and grounds for termination. Without well-defined founder agreements, several details related to the startup will always remain unclear and murky leading to disputes.

Larissa Pickens, Everfumed

Learn all about a Partnership agreement and why you need it for your startup and legal needs here.

14. Not Using Non-Disclosure Agreements to Keep Their Business Safe and Confidential

A dangerous legal mistake a startup can make is not taking steps to ensure that its confidential information is kept secure. Without adequate protection, other companies may be able to copy or steal a startup’s ideas, which can destroy its competitive advantage.

Confidentiality agreements are important for businesses of all sizes. They are also known as non-disclosure agreements. By having employees, independent contractors, and other business partners sign a confidentiality agreement, you can help protect your company’s proprietary information, business idea, and trade secrets.

A well-drafted confidentiality agreement will spell out what information is considered confidential and how it should be protected. The agreement will also set out the consequences for breaching the agreement, which can include financial damages and legal action.

Keep your business safe with this Confidentiality Agreement in place.

15. Make Decisions Without Consulting a Lawyer

As a lawyer, one of the common legal mistakes startups and small businesses that I see them make is that they often make decisions without fully understanding the legal ramifications of those decisions.

This can lead to costly mistakes that could have been avoided with proper guidance from a lawyer.

When it comes to making decisions about your startup, it’s always best to consult with a lawyer to make sure you’re not missing out on any important protections.

Whether it’s a website legal audit, a custom contract you need for your business, or simple legal coaching to get answers to your questions, consulting with a lawyer can help you avoid costly mistakes down the road and ensure that your business is able to succeed. If you need any help, schedule a call with a lawyer and entrepreneur here.

Startup legal issues

As a startup, you will likely face a variety of legal issues. It is important to be aware of the many different types of legal issues that can arise and to have a plan in place to address them. Here are some common startup legal issues to be aware of:

1. Intellectual property:

If you have developed any unique products, processes, or other intellectual property, you will need to protect it from infringement. This can include registering for patents, filing a patent application, and registering for trademarks, or copyrights in the United States or your country of residence. Here’s a helpful trademark guide you’ll need.

2. Employment law:

If you have employees, you will need to comply with various employment laws, such as those related to wages, hours worked, and benefits. You will also need to have employment agreements and policies in place regarding things like discrimination, harassment, and workplace safety.

3. Contracts:

Any time you do business with someone else, there’s a potential for legal issues.

It is important to have well-drafted contracts in place that clearly spell out the rights and obligations of each party. The purpose of the agreement is to avoid those costly entrepreneurial mistakes and legal issues.

Get all your business contracts from our store here.

Watch this video to learn about one of the important contracts: The affiliate Agreement

4. Regulatory compliance:

Depending on your business, you may need to comply with various government regulations. This could include things like complex taxes, environmental regulations or financial reporting requirements.

5. Liability:

If your business is sued, you could be held liable for damages. This is why it is important to have liability insurance in place.

Here are 15 more legal tips for bloggers to protect themselves and their online businesses.

Final Thoughts on Legal Mistakes Made by Startups

As you can see, there are a number of legal mistakes that startups often make. Many of these can be avoided with proper planning, proper legal agreements, and guidance from experienced legal counsel on intellectual property law, state law, employment contracts, and other legal issues.

However, even with the best intentions, some experienced founders and startups still make common mistakes that can have serious consequences.

Are you wondering what essential business contracts you must have as an entrepreneur? Find out the 6 essential business contracts you need here.

Is Your Online Business Legal?

Are you making these 3 legal mistakes in your business? Find out how to protect yourself and your online business legally,
absolutely FREE!