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4 legal mistakes that cause startups to crash and burn

Entrepreneurs and founders of startup companies are often so eager to get their ideas into flight that they overlook important legal details that could cause major problems after take-off. If you are thinking about founding a startup or have recently done so, make sure you haven't made any of the mistakes below.

1. Not having a solid founder agreement in place.

Even if things are going great with your co-founders now, things could change, especially when expectations are not clearly established. For that reason, you need to have a legal document in place detailing issues such as:

  • The overall goal and mission of the business
  • Each founder's role and responsibilities, including the time commitment expected of each founder and how day-to-day decisions should be made
  • The salaries that any of the founders are entitled to, and if/when that amount can change
  • Each founder's ownership share of the company, and whether that percentage is based on continued participation in the business
  • What happens if one founder decides to leave the company (i.e. Do the other founders have the option to buy out his or her shares? If so, at what price?)
  • Whether a founder can be removed as an employee of the business
  • How a business sale should take place

2. Not forming the right type of legal business entity.

There are many types of business structures available, each one resulting in different tax and liability consequences. For that reason, you want to make sure that you choose the business entity that makes the most sense for your situation.

As this article from Forbes points out, corporations or LLCs are generally the best choice for startups because of the significant advantages they often have for founders and potential investors, including liability protection from business creditors as well as tax savings.

3. Not making sure intellectual property is adequately protected.

It's essential to make sure that whatever unique product, service or idea you are offering is protected from competitors. You also need to make sure that your brand is protected so that another company can't just cash in on your hard work.

You can protect your business' intellectual property rights with legal tools such as copyrights, trademarks and patents. Find out more about intellectual property law here.

4. Not working with a business law attorney.

The good news is that you can avoid all of the mistakes discussed above and many more by working with an experienced business law attorney. Founding a startup can be extremely lucrative in this market, but only if it's done right.

An experienced attorney can help make sure that all necessary legal issues are addressed so that you and your business can fly high.

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