Thinking of turning that great business idea into a start-up company? Regardless of the industry, potential size or financing needed, entrepreneurs on the precipice of starting a company should be thinking about one very important thing at the outset – risk avoidance. Risk avoidance for business owners falls into four general categories: (1) protecting your personal assets; (2) structuring your business to achieve the most favorable tax treatment; (3) regulatory compliance; and (4) litigation avoidance.
Choosing a Legal Structure is a Key First Step
One of the first legal considerations for a start-up is choosing the right legal structure. This decision will impact various aspects of your business, including business liability, personal liability, taxation, and ownership. Common structures for start-ups include sole proprietorships, partnerships, limited liability companies (LLCs), and corporations. Corporations are further broken down into S-Corporations and C-Corporations, each with their own requirements and characteristics. Each of the foregoing structures has its own advantages and disadvantages, so it’s important to consult with a legal professional to determine the best fit for your specific circumstances, needs and desires. Obtaining an Employer Identification Number (EIN) is also an important initial step. This will allow you to set up bank accounts and lines of credit under your business name, which will further separate your personal assets and liabilities from your business assets and liabilities.
Once you decide on a legal structure that is right for your business, you will need to register that business with the Secretary of State. Depending on your entity type, your business will have regular reporting requirements with the Secretary of State to keep your information current with state authorities. Moreover, effective January 1, 2024, the Corporate Transparency Act (CTA) will require your business to report to the United States Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).
Intellectual Property? Protect and Safeguard It!
Another crucial piece to consider is intellectual property (IP) protection. Start-ups often rely heavily on IP, such as patents, trademarks, copyrights, and trade secrets. Oftentimes IP is a fledgling business’ only asset. It is essential to understand the different types of IP protection and the steps you can, and should, take to prevent others from infringing upon it. This may involve applying for patent and/or trademark registrations, drafting and enforcing non-disclosure agreements (NDAs) when disclosing confidential information and trade secrets to third parties, having employees sign Confidential Information and Inventions Assignment Agreements (sometimes called CIIAAs), and implementing internal policies to safeguard trade secrets.
Be Aware of Employment Laws in Your State
Employment law is another area that start-ups need to navigate carefully. As your company grows, you may hire employees, making it important to comply with labor laws and regulations, which is no small task. This includes understanding minimum wage requirements, overtime rules, anti-discrimination laws, and employee benefits, to name a few. Additionally, start-ups often rely on independent contractors or freelancers, and it’s crucial to properly classify these workers, or make them employees, in order to avoid misclassification issues. It is very difficult in California right now to have legitimate independent contractors. You should always consult an attorney before deciding to classify workers as contractors as misclassification can lead to a host of legal problems and significant damages and penalties.
When entering into contracts with other parties, which may include, without limitation, suppliers, customers, and partners, it’s important to have well-drafted contracts that clearly outline the rights and obligations of each party involved. This can help prevent disputes and provide legal protection in case of disagreements. Also, it’s a good idea to proactively protect yourself by obtaining a business insurance policy. These should include general liability, errors and omissions and umbrella insurance, if appropriate, and may also include employment practices liability insurance (commonly referred to as EPLI).
Data privacy and security are also critical considerations for start-ups, especially in today’s digital age. Depending on the nature of your business, you may collect and store sensitive customer data. It’s important to comply with applicable data protection laws, such as the General Data Protection Regulation (GDPR) when selling goods and services to customers residing in the European Union as well as the California Consumer Privacy Act (CCPA) and California Privacy Rights Act (CPRA), which apply to business selling to California residents. Other countries and states have their own laws and requirements, which may differ, so it’s a good idea to consult with legal counsel when considering your privacy obligations. Implementing robust data protection measures and having clear privacy policies can help mitigate legal risks.
Securities laws may also be relevant for start-ups, particularly if they plan to raise capital through investors. The Securities and Exchange Commission (SEC) regulates the sale of securities, and start-ups must comply with various rules and regulations when seeking funding from investors. This may involve things such as filing a Form D exemption with the SEC, providing potential investors with disclosure documents, and adhering to anti-fraud provisions.
Lastly, start-ups should be aware of any industry-specific regulations that may apply to their business. Certain industries, such as healthcare, finance, food services, and the alcohol beverage industry have additional legal requirements and compliance obligations, some of which are extensive and onerous. It’s important to research and understand these regulations to ensure your start-up operates within the boundaries of the law. Create a compliance plan to guide every aspect of your business and further safeguard your risk.
There is more than one way to set up a business. The legal considerations for a start-up company are multifaceted and complex and that requires careful consideration. From choosing the right legal structure, to timely reporting with various state and federal agencies, to protecting intellectual property, complying with employment and securities laws, and addressing data privacy concerns, start-ups must navigate a complex legal landscape. Seeking guidance from legal professionals and staying informed about relevant laws and regulations is crucial for the success and longevity of your start-up.
If you have any questions about this article, please contact attorney Andy Russell (arussell@carnaclaw.com) or Emilie Elliott (eelliott@carnaclaw.com) for any further questions you may have regarding successfully starting a company.
About Carmel & Naccasha
Founded in 2004, Carmel & Naccasha has offices in San Luis Obispo and Paso Robles. The firm’s lawyers focus their practice and provide exemplary client services in the areas of business transactions, real property, land use, commercial and employment litigation, trusts and estate planning, municipal law, and insurance coverage. For more information about Carmel & Naccasha, visit the website at www.carnaclaw.com
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