Why Startups Need Lawyers Early in the Company’s Formation Process

August 15, 2020

Creating a startup is an exciting time for many business owners, but it can also be stressful. And with so many tasks to complete, it can be easy to overlook…

Creating a startup is an exciting time for many business owners, but it can also be stressful. And with so many tasks to complete, it can be easy to overlook something. While startups often have an extremely restrictive budget, hiring a lawyer early in the company’s formation process can be one investment you don’t want to skip.

Attorneys can help with anything from compliance issues to ensure you avoid fines or penalties to finding ways to minimize your tax burden. In many instances, a great attorney’s advice early on can save you tons of money in the long run, and help to protect your newly-founded company. An overview of some of the instrumental ways attorneys can assist in the formation of a company includes the following activities.

Formation of the Company

Your startup will have to decide what type of business form it takes relatively quickly, as either a sole proprietorship, a partnership, an LLC, or a corporation. The type of business form your startup assumes will dictate its legal responsibilities, potential liabilities, and how it operates. A business attorney can help you to understand the subtle and not-so-subtle nuances that differentiate these business types to ensure that you select the most appropriate one and complete all of the paperwork and activities required to comply with any applicable regulations.

Agreements & Contracts

If there are multiple individuals involved in the founding of a company, you will want to create partnership agreements or corporate bylaws if the business is incorporated. These agreements should be comprehensive enough that they serve to resolve future conflicts and potential litigation. Even if all the partners have a shared vision when founding a company, there is no guarantee that they will always agree on its vision for the future. Debates and disagreements arise. An experienced attorney can draft these agreements to be comprehensive enough to have strategies to address potential issues.

Businesses also have many contracts to leas space, provide services, and purchase supplies. There may also be contracts with investors and employees. If you don’t have an attorney review these contracts, you may not be getting favorable terms. And if you don’t use contracts at all, there is a high chance you may end up in court someday. Litigation is much more expensive than having an attorney review contracts upfront.

Protecting Your Brand, Ideas, and Products

Startups are often innovative. They bring new ideas to industries where there may be a service gap. But without the right protections in place, such as a trademarked brand name or logo or a patent in place, you risk losing your competitive edge. And since patent and trademark applications can be cumbersome and time-consuming processes, it’s always better to have someone with experience in this process on your team. Off-loading these tasks to a knowledgeable attorney ensures that your applications will likely be approved and frees up your time to focus on other aspects of starting your business.

Compliance

Businesses are highly regulated in the United States. Some entities need licenses and permits before operating. And depending on the type of startup you have, you may have additional FDA, environmental, medical, zoning, or other regulations that you must follow. Complying with all the federal, state, and local regulations can be incredibly confusing for new business owners. Startup lawyers can help you navigate this environment and ensure that you are complying with applicable regulations – and avoiding expensive fines or penalties.

Human Resources Concerns

As your business grows, you will need to hire employees or contractors. But before this, your business needs an Employer Identification Number (EIN) from the IRS, and it will need to secure workers’ compensation insurance. On top of that, your company will need employment agreements, policies, and procedures, and financial structures to ensure payment is compliant, and all taxes are withheld according to IRS regulations. Hiring can create a lot of liability if the company doesn’t have all of its ducks in a row. Working with a business attorney can ensure that you lay all the right groundwork so that initial hiring goes smoothly and that the company is fulfilling all of its obligations to employees.

This list represents some of the common ways that startup lawyers can assist during the formation and early growth of a company. They can also help with other concerns, such as registering websites, issuing stock, complying with SEC regulations, securing financing/funding, addressing tax concerns, and registering your business in multiple states. An experienced attorney can ensure that all aspects of your startup formation go much more smoothly than they might otherwise. Before moving forward with your startup idea, it’s a great idea to discuss your concerns and needs with a lawyer who understands the startup environment.

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