Top 10 Legal Must Do's Checklist for Startups
Starting a business or already have a startup? Here is a checklist of the Top 10 Legal Must Do's to increase the success of your startup - legally.5 min read
2. 2) Incorporate in Delaware
3. 4) Apply for an Employer Identification Number (EIN)
4. 5) Perform due diligence on your investors
5. 6) Create a vesting schedule for the founders
6. 7) Protect your Intellectual Property
7. 8) Know how your employees are classified
8. 9) Comply with Securities Laws
9. 10) Hire competent legal counsel
Updated November 26, 2020:
Starting your own business can be a difficult task and complying with all of the legal requirements can be overwhelming. The following list includes the most important elements any startup should meet to avoid a list of potential legal issues.
1) Form the proper business entity
Choosing the proper business entity for your startup is crucial because it affects your personal liability, how much you and the entity pay in taxes, and your ability to raise funding. It’s a good idea to first decide whether you want to raise capital from any outside investors.
If so, it’s usually best to form a C corporation. A C corp’s structure could result in double taxation, but investors are usually more open to investing in this type of structure, and startups that raise venture capital are unlikely to distribute dividends. For that reason, double taxation usually isn’t as large an issue. An LLC would be the best structure for a business that intends to stay small with only a few owners.
If you’re not sure which business entity would best suit your needs, you can find an experienced corporate attorney on UpCounsel for more advice.
You should incorporate your startup in Delaware no matter where you are located, but you should also look into incorporating in your home state. Delaware’s court system is known to provide maximum flexibility in business entity structures with its well-developed case law.
Corporate attorneys are more familiar with Delaware law mainly because more than 50% of U.S. publicly traded companies have their legal home in Delaware. Your startup will reflect credibility as a Delaware incorporated business when approaching outside investors as well since most require it.
3) Create a written agreement between your business owners
If you’re working with multiple business owners, it’s important to make sure that each person knows and understands his/her rights and responsibilities. If you’re forming a corporation, this means creating a shareholder agreement and the Articles of Incorporation. The Articles must contain the number of authorized shares, state the purpose of the company, identify the incorporators and the agent authorized to receive service of process, and provide the name of the corporation.
4) Apply for an Employer Identification Number (EIN)
To open a corporate bank account and to properly file your business tax returns, you will need an Employer Identification Number (EIN). You must request one from the IRS and may apply over the phone or by using an online application on the IRS website.
You will need the social security number of the person completing the form for the company (usually the President or CEO). Include information on your business entity and date of incorporation. Make sure to keep a signed copy of this application in your files – ask for one if you apply over the phone.
5) Perform due diligence on your investors
Venture capitalists and angel investors are certainly doing an abundant amount of research on your startup; therefore, as a founder, you should do the same. You want to make sure that your investors are just as committed as you are to your brand because they will be your long-term partners.
You also want to make sure you know enough about their background and industry expertise. Conduct LinkedIn searches, learn about their expectations, and even get to know them on a personal level to make sure they are the right fit for you.
6) Create a vesting schedule for the founders
A common issue among founders is the level of commitment each person brings to the table. Upon incorporation, founders should create a vesting schedule that states that stock ownership will vest over time. This is important not only because it prevents one founder from quitting and being able to keep all of his/her stock, but it’s also usually required from investors before the first round of financing.
You want to have a vesting schedule created before negotiations with investors take place or else they may want to impose a certain schedule. If you already have an existing system, they are more likely to follow what you have implemented.
7) Protect your Intellectual Property
File any patents as soon as possible, for the process to issue a patent can take more than 5 years. Investors are more likely to invest in a company that has protected its patent. Make sure you have the exclusive right to reproduce and display your work. Pick a name for your company that is specific to the products/services you provide and prevent others from using a similar mark. Decide what is considered a trade secret and keep that information secure against unauthorized access.
Since IP can entail a vast array of legal to-do’s, you should consult an experienced IP attorney who can help you through the process and provide you the utmost protection.
8) Know how your employees are classified
A very common mistake when startups first hire employees is misclassifying them. Know the difference between an employee and an independent contractor.
The main difference between the two boils down to control, regardless of what the worker may be called in any sort of agreement. If the startup requires that the worker show up at a certain time, work a certain number of hours, and be under a great deal of supervision, it’s unlikely that he is an independent contractor. More control over the employee means it is more likely that a court will deem him/her an employee.
9) Comply with Securities Laws
Founders and investors of LLC’s, C-corporations, and partnerships are subject to federal and state securities laws. These laws were made to require companies to provide reliable and accurate information about their businesses to enable a fair market. They also protect from insider trading and trading fraud. Failure to comply with these laws can result in the startup having to repurchase all of its shares at the issuance price, even if the company has lost all of its money.
10) Hire competent legal counsel
Startups are usually concerned about expenses, but shouldn’t be as concerned when it comes to having the right attorneys on your side. Startups should retain experienced legal counsel who has expertise in employment law, contract law, securities law, and intellectual property law, to name a few. The work may be spread out between different firms and attorneys, and the cost is worth avoiding any legal trouble.
If you need help finding a competent attorney to help with your startup, UpCounsel has a wide range of qualified attorneys for you to choose from.