You think of yourself as a young, successful entrepreneur. You’ve been adding infrastructure to your startup and religiously adding clients to your company’s roster. You’re considering hiring an intern or two to help with the workload. You’ve been happily chugging along on your project, all from the comfort of…your parents’ basement?
Your startup may not have the glamour of a bigger venture, but once it’s grown large enough, you too will hope to move out of the basement. To avoid getting a raw deal, it’s important that you take care of potential liabilities up front.
What You Need to Do Now
If your startup is ready to make the transition from a weekend project to a business, there are five things you need to have in order before you go any further.
- Get your relationship with your partners in writing.
Formalize, in writing, agreements you and your partners have made, including any buyout provisions in case you split up. You think nothing could go wrong now, but you’ll regret it later if you don’t get this in writing. It’s always best to iron out disagreements when people are feeling good about the business and each other – rather than trying to figure things out after a dispute. Humans are emotional creatures. In tough situations, reason goes out the window.
- Get any other important relationships in writing.
If you have crucial arrangements with customers or suppliers, don’t leave those to chance. The terms of these relationship needs to be explicitly spelled out; the communication in a handshake deal isn’t very detailed or distinct, so make sure everyone has the same expectations. Genuine and honest misunderstandings early on can result in expensive disputes later.
- Get liability insurance.
Often, people form an LLC and think that the term “limited liability” protects them from being sued. Wrong. You can be sued for your own acts, even if those acts were committed in the course of running your business. An LLC or corporation merely protects you from being sued for others’ acts. You need an errors and omissions insurance policy to protect you from liability.
- Create a business plan.
This isn’t a legal issue, per se, but writing out a business plan forces you to think about all the steps ahead. A business plan can prevent you from going down costly paths that ultimately turn out to be the wrong ones.
- Have a plan to finance your business.
Again, this isn’t a legal issue – but if I were in your shoes, this would be my top priority alongside protecting my business. You need to know how you’re going to get the money to start your business, at least at a minimal level of operation, prior to putting significant amounts of work or money into the venture.
Why You Need a Lawyer
While it may be the last thing you’re thinking about as you’re launching your business, legal issues should be considered from the beginning. You can pay a lawyer a relatively small amount now and get things right, or you can pay lawyers a whole lot of money later when you’re embroiled in litigation. Engaging in business transactions without properly documenting them is asking for trouble down the road.
The real need for a lawyer arises from:
- Entering into a business relationship with another person. This includes anyone from a partner to a financier to a key supplier. Once others are involved, there’s someone else who has different interests than you do – even if you’re all on the same side.
- Accepting money from someone else to finance your business. Accepting money from an external source often means you’ve sold that person a security, which is highly regulated. Securities laws can impose significant liability on you and your business, so it’s important to consult a lawyer whenever you sell stock, LLC interests, notes, or any other interest in your company.
- Entering a regulated field. If your business revolves around healthcare, financial management, alcohol, or any other highly regulated field, you need a lawyer to help you handle compliance.
Don’t take a chance – play it smart with your business, and get a lawyer involved early on to protect your assets. Plan well, and you won’t be making a return trip to your parents’ basement.
Alexander Davie is an attorney with Davie Law Group PLC. Alexander represents entrepreneurs, financial advisors, and emerging companies in their corporate, securities, and real estate matters. For more legal information, follow Alexander’s blog at StrictlyBusinessLawBlog.com.Suscribe to the podcast