5 Fatal Legal Mistakes Startup Founders Should Avoid

Launching a startup is no longer about money and networking. It is more about being passionate about your dream and finding the right opportunity when it is around. Attracting the initial capital is a breeze if you start on the right note. 

Being in the US gives you an extra advantage because the country has one of the best startup ecosystems. Statistics show that it is the leading country when it comes to the number of startups (75,056). Additionally, it is the home to around 50% of unicorn companies. 

When it comes to state-wise statistics, Tennessee has a thriving startup landscape. The state has a business-friendly environment and low cost of living, making it one of the best entrepreneurial destinations. Murfreesboro is an ideal place to launch a startup as it ranks as the third fastest-growing boomtown in the country. You can start small in the city and lead your startup toward success.

On the other hand, data shows that 20% of new businesses fail every year. It means you need to think about every move twice before making it. A few blunders can land you in big trouble and even kill your entrepreneurial venture. You need to be extra vigilant about legal mistakes. Awareness gives you a head start and helps you avoid such errors.  

Here are the fatal mistakes startup founders should steer clear of:

Blunder #1- Not Getting Legal Guidance From the Outset

Starting a company in the US entails a complicated legal process, from choosing the right legal structure and registering the business to writing a founders’ agreement, getting the necessary permits, and more. There’s no room for error anywhere, and DIY is the worst way to handle these legal aspects. There are state-specific requirements as well.

If you are in Tennessee, you need to follow a specific set of rules to set up an LLC here. Collaborating with a local attorney can save you from costly blunders. Hiring one of the seasoned business attorneys in Murfreesboro, TN, should be your first step while planning a startup launch in the city.

According to Hudson, Reed & Christiansen, PLLC, entrepreneurs must look for someone with expertise in business formation as they can offer valuable guidance on the structure of the company. Further, startups must seek advice on contracts, business transactions, zoning laws, and employer rules from the outset.

Blunder #2- Missing Out on Tax Considerations

Every state has some tax laws for businesses, and missing out on them can be a killer mistake. Even if you choose one of the tax-friendly states like Tennessee for your startup, you still need to comply with the rules to avoid painful penalties down the road. 

Proper legal planning can help you keep unintended and unanticipated taxes, penalties, and fines at bay. Here are a few steps to be safe: 

  • Obtain a tax ID
  • Know the state-specific taxes
  • Maintain records of income and expenses
  • Collaborate with a tax specialist
  • File returns and pay taxes on time

Blunder #3- Failing to Maintain Proper Documentation

Another legal mistake American startup founders often make is failing to maintain proper documentation. Corporate and HR documentation is essential for business compliance in the US. Unfortunately, inexperienced business owners consider them an extra burden and skip them, only to land in big trouble down the road. Here are a few documentation essentials you must maintain:

  • Signed contracts with co-founders, employees, clients, and third-parties
  • Board and shareholder resolutions and minutes
  • Stock and option records
  • Anti-harassment and discrimination policy
  • IRS W-4 forms
  • Employee personnel files 
  • Workers’ compensation documents

Blunder #4- Not Paying Attention to Privacy and Intellectual Property Laws

You may be on top of contracts, taxes, and documentation, but matters like privacy and intellectual property laws are easy to overlook. Both can have dire legal implications. The recent Meta scandal highlights the challenge of customer data sharing and privacy for businesses. Imagine falling into a legal trap only because you failed to ensure the security of your website and customer data.

Protecting your intellectual property from infringement and avoiding lapses with the intellectual property of other businesses should also be a priority. Generative AI has made IP issues more widespread, and startup owners can get into trouble because of a sheer lack of knowledge and experience. Getting legal advice is the best defense against these mistakes.

Blunder #5- Not Handling Employee Termination Ethically

Managing startup teams is perhaps the hardest part of running a new business. You may struggle to find the best people for your team in the first place. Employee termination is an even bigger problem because doing it wrongfully can lead to lawsuits. Terminating an employee entails legal risk if you fail to handle and document the process properly.

Also, laws prohibit termination based on gender, race, color, national origin, marital status, sexual orientation, religious preference, disability, and absenteeism due to military service or jury duty. Allegations of discrimination and retaliation for sexual harassment are also serious legal concerns. Avoid such issues and define a clear employee policy from the outset.

Staying Safe

Startup owners must go the extra mile to avoid these legal blunders, considering the prevalence of business litigation in the US. Statistics show that 90% of all businesses face a lawsuit at some point, and 45% of small businesses are currently facing litigation. 

The last thing you want to face is legal trouble in the early stages because it can kill your time, revenues, and reputation. Getting legal advice and following it can help you avoid these blunders and stay safe.