Monday, October 17, 2011

Ten Legal Mistakes Made by Start-Ups

The next several postings will focus on ten significant myths relating to start-ups -- while these are not the only legal mistakes fledgling businesses make, they are some of the common ones I have noticed in working with start-ups.  Note, the mistakes discussed in the next several posts are not presented in any particular order, and so today we start with an obvious but very common myth.

MISTAKE NO. 1:  "I don't need to incorporate as this is a no risk business."

While new businesses often have limited financial resources, it is a mistake to believe that since the start-up may not have any assets there is not need to "waste" money on incorporating.  You may even see comments on the Internet or hear stories of businesses that waited to incorporate, implying that business incorporation is a concept pushed by lawyers seeking fees.  The fact is that without a proper business entity not only are the assets of your business exposed, but your personal assets are exposed to any obligations incurred or liabilities arising in connection with your business.

Okay, but your response is that my business is simple, it's not borrowing money, there are no employees, no leases, no contracts, no products or services that could cause any harm, and thus there is no risk.  Wrong, there is always risk any time you offer goods or services for sale/licensing or distribution.  Some of the risks are obvious, like selling goods that turn out to cause an injury or offering a service that a customer complains failed or lead to some harm; and some are less obvious, like selling goods or services that turn out are infringing intellectual property rights of a third party or the business fails and business creditors are seeking payment.  Without a proper business structure-- whether a corporation, LLC, SCorp or Limited Partnership -- the business risk unnecessarily becomes a personal risk.   

Significantly, there are choices when incorporating your business, and these choices depend on several factors, including tax concerns.  It is important that you discuss your plans with a experienced business lawyer who will advise on the proper business organization to fit your new business.

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