If you are in the process of starting a new business venture, there are many things that you need to think of to ensure that your new business is protected when you get started. Here is a list of a few legal items to consider before getting started.
Your Business Name
You probably have a cool name for your new business. Before you start using the name you have chosen, make sure that the business name is not being used by anyone else. You can do so by searching the Secretary of State's database to see if your chosen business name is already taken. If the name is available, you can reserve the name with the Secretary of State's office while you prepare your articles of incorporation, articles of organization, or partnership agreements to be filed with the State.
The Structure of Your Business
Once you have decided on your business name and made sure that it is available for use, you will need to consider which business structure you wand for your business. Your business can be structured as a sole-proprietorship, partnership, limited partnership, corporation, S-corporation, or limited liability company. Before deciding on what structure is best for you, you will need to consider tax implications and liability issues associated with your business.
Filing a Trademark
Once you have your business name and business structure figured out. You should consider filing a trademark application for the name of your business and logo with the United States Patent Office (USPTO). You business name and logo are your corporate identity. They are what you use to promote your products or services to consumers and clients. A registered trademark is a valuable asset for your business that protects the brand of your business. The more your business reputation grows, the more valuable your banding will be. Therefore, you should seriously consider trademarking your business name and logo.
Filing for a Tax Registration Number and Business Licenses
At a minimum you will need to file for a Federal Employer identification Number (FEIN or Federal Tax Id). Depending on your business, you may also need to obtain a business license to do business in the state that your business is located in as well as apply for other licenses and permits.
Selecting a Location
Local zoning regulations are something that you will want to keep in mind when selecting a business location. Don't assume that just because other similar businesses are located in a particular location, that the zoning is appropriate for your business. Other businesses might have been there for a while and the local zoning regulations may have changed since then. Make sure that the zoning is appropriate for your business before settling on a location for it.
Besides the business formation documents mentioned above, this is a list of some of the legal agreements that you should consider having in place when starting a new venture:
- Governing Documents
Depending on the your business entity's structure, your will want to ensure that you have the appropriate documentation in place to assign the appropriate rights and responsibilities for the owners of the company. A corporation should have bylaws in place that define the rights and responsibilities of corporate shareholders and also dictate when shareholder meetings will take place. Similarly, LLCs should have an operating agreement in place. An operating agreement describes the way and LLC will be managed and the way profits and losses will be distributed amongst its members. These agreements ensure that any disagreements between owners/shareholders of a business are resolved in a cost effective and timely manner.
- Shareholder Agreements and Buy Sell Clauses
A Corporation's Shareholder Agreement or an LLC's Operating Agreements should always include buy-sell clauses. Buy-sell clauses determine what happens when a shareholder leaves a business. For instance, in startups, it is not unusual for a founder to move onto another venture. In such an instance, a buy-sell clause makes it easy for place a value on the departing founder's shares. If there is no buy-sell clause or agreement in place, founders often enter into a costly legal battle to resolve differences in opinion as to how to handle a founder's departure.
- Employee Contracts
A startup business often succeeds or fails depending on the strength of its employees. In most states, employees are considered “at will” employees and can leave at anytime. An employment contract allows early stage ventures to ensure that employees that are critical to their venture stay onboard for a specific time. It can also include noncompetition, nondisclosure, and intellectual property protection clauses that can protect your business in case an employee decides to leave and start a competing business venture or leave to go work for your competitors.
- Independent Contractor Agreements
Many businesses utilize the services of an independent contractor to perform services instead of hiring an employee to perform the services. Unlike an employee, an independent contractor does not work regularly for an employer but works as and when required. A written independent contractor agreement helps establish a worker's independent contractor status by demonstrating to the IRS and other agencies that your business and the worker intended to create a independent contractor relationship, not an employer/employee relationship. A written independent contractor agreement may help clear up confusion over worker classification, payments, deadlines, taxes, and dispute resolution. Additionally, a well written independent contractor agreement should shield your business from liability due to the contractor's misconduct, protect your intellectual property, and have a strong nondisclosure and competition clause.
- Confidentiality and Nondisclosure Agreements
Your business should have strong confidentiality and nondisclosure agreements for any financiers, independent contractors, employees, or consultants since these individuals will have access to business information that you will most likely want to keep private and not expose to your competition.
- Intellectual Property Assignment Agreement
Many business ventures are founded on exciting new intellectual property. This may be in the form or copyrighted software, a proprietary secret formula, or patents pending for new technologies. Without an intellectual property assignment agreement, the business may not truly own the rights to the intellectual property. For instance, if your business is a software company that relies on a software that is core of you company's and that software was developed by a founder before the company was formed, without a written assignment agreement that transfers the copyright to that software to the company, the company does not own the rights to the software, the founder does. This scenario also applies to independent contractors that your company may have hired to develop software for you. Without a proper intellectual property assignment agreement in place, your company can face dire consequences if the founder leaves the company or if the independent contractor refuses to assign the copyright to your company later. You should ensure that your founders, employees, and independent contractors sign intellectual property assignment agreements at the outset so that your business does not have to face obstacles later. For instance, if you are seeking funding for your venture, investors will almost always ask if your business owns its intellectual property. Therefore it is essential for your business to have unencumbered ownership rights to its intellectual property. This is accomplished through two different mechanisms.
a. Technology Assignment Agreement
Technology assignment agreements relate to intellectual property created by founders before they became shareholders in the company. By signing a technology assignment agreement the founder sells, transfers, or conveys (for stock in many instances) intellectual property to the company.
b. Invention Assignment Agreement
This agreement should be put in place to assign any intellectual property by founders or employees after the incorporation of the business to the company.
Starting a new business is exciting and challenging. By ensuring that you have certain legal start paying attention to your legal startup documentation in place at the inception of your business, you can avoid many potential future pitfalls.