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Five Legal Myths about Startups
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Five Legal Myths about Startups
Last year, more than *565,000 businesses were started in the U.S. The majority will make it – at least for a number of years – some will not. Unfortunately, many owners believe certain myths about starting and running a business and these beliefs can be their undoing. If you’re thinking of starting a business or have recently begun one, make sure you know fact from fiction so you can be a good statistic!
Myth 1: You can do it yourself.
When getting started, many owners try to save money by doing everything they can by themselves. They form their own corporations or limited liability companies (LLCs) and write their own contracts and other agreements. Doing some legwork can reduce the cost of legal fees and this is a good thing. However, there’s no substitute for professional advice. The cost of legal fees can be cheap in the long run if they save you from expensive litigation or other serious problems.
Turn to an attorney for the following:
- Determining which type of entity is best for your situation (corporation? LLC? sole proprietorship? etc.)
- Setting up the entity you decide on (or at least reviewing submissions if you choose to do it yourself using an online incorporator such as *BizFilings or *Legal Zoom.
- Drafting contracts and other agreements for your business to use.
You can minimize attorneys’ fees by doing some work on your own. For instance, you can use various online templates to write an employee agreement, but then rely on the attorney to view what you’ve done. Find some useful agreements at the SBA site.
Myth 2: A handshake seals the deal.
When you do business, it’s great to have trust. Many in the diamond industry trade millions of gems on a handshake. But for the rest of us, paperwork is better. Oral agreements can lead to misunderstandings and can be difficult to prove in court. In some situations, written agreements are mandatory if you want to sue.
You should put in writing:
- Agreements with co-owners. Partnership agreements spell out terms and expectations of owners and help to settle in advance what happens if one owner wants to leave the business or when partners disagree about things.
- Employee agreements. Make sure that when hired, employees sign nondisclosure agreements so they keep company secrets (pricing, etc.) confidential.
You must put the following in writing:
- The sale of goods for more than $500
- The sale of real estate.
- Agreements that take longer than one year to complete.
Again, templates can minimize legal costs, but are no substitute for a thorough legal review to make sure your interests are protected.
Myth 3: Incorporating protects your assets.
Many owners are under the misimpression that their personal assets are protected if they incorporate or form an LLC. While these entities do protect assets from the claims of many creditors, there are a number of situations where owners remain exposed:
- Co-signing any company obligations, such as leases, business car loans, and lines of credit; in most cases, owners are required to give their personal guarantee.
- Not paying employment taxes to the government. Owners who fail to pay withheld income taxes and the employee share of Social Security and Medicare taxes are personally liable for these amounts.
- Using a business as your personal pocketbook. If you fail to keep business finances separate from your own, then any creditor can set aside the legal protections you thought you had.
Myth 4: No legal protection for the company name is necessary.
Maybe you’ve thought up a clever name for your company or product. Maybe you have a great tag line for advertising. The problem is: someone else may have also had the same idea and taken steps for legal protection. Don’t assume you don’t need to seek protection for your intellectual property (IP).
- Using someone else’s protected name or other IP can expose you to costly lawsuits.
- Not protecting your own IP can cost you in legal fees down the road if another business uses your IP.
Myth 5: Being small makes you invisible to the government.
Businesses are highly regulated at the local, state, and federal levels. While some laws exempt small businesses, many regulations apply regardless of company size. Assumptions that rules or regulations don’t apply or that businesses won’t get caught can get a business owner in serious, and costly, trouble.
Regulations can seem overwhelming. Get started by checking the SBA’s Business Law and Regulation page. Also, talk with your local chamber of commerce or other business organization for guidance on how to stay compliant with government rules and regulations.
Starting a business requires you to open your eyes and dispel the myths that can get you into trouble. When in doubt, ask an expert. There is free help through SCORE.
*Denotes a non-government Website
Barbara Weltman is an attorney, author of several business books including J.K. Lasser’s Small Business Taxes, and trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and her monthly e-newsletter Big Ideas for Small Business®; both are available at www.barbaraweltman.com, and host of Build Your Business Radio. Follow her on Twitter at twitter.com/BarbaraWeltman.
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