New Business Owners’ Top Three Legal Mistakes

Just this week, American City Business Journals published an article entitled “18 Legal Mistakes Business Owners Make that Can Cripple Their Companies.” (we really encourage you to take a look at it after reading this article; all entrepreneurs could learn from the advice!) The article sets out mainly oversights that new business owners and entrepreneurs make when starting their business. What’s more—they’re simple oversights that can easily be mitigated. Here are what we think are the top three from the list:

1. Failing to Have an Owner’s Agreement. Nothing is more characteristic of most new business owners than that they have no formal agreement between them. When you’re on your own, it’s not a problem, but in today’s world, business is complex, and many don’t go it alone. In fact, we recommend you don’t; surround yourself with other intelligent and motivated people, and your business will have a much higher chance of success.

So, often, new business owners (plural) will late one night come up with a fantastic idea, and voila! the next Facebook is formed. But consider this, as the article asks all new business owners to do: What happens when things between you don’t work out? Just ask Mark Zuckerberg or watch the Social Network. You’ll see that a lack of owner agreements can jeopardize not only the future capital structure of the business, but also leave business owners with nothing to turn to in order to settle important questions like how much of the business each owner actually holds as well as how the owners can sell their stakes and how much control they might have over the company in the future.

In a sense, an owner’s agreement or a member control agreement (if you’re an LLC), is like a Constitution. It sets out what rights and duties each of the owners or members has in the new business. These are all vital considerations that a business incorporations attorney can help new business attorneys draft without too much cost or expense.

2. Failing to Protect or Respect Intellectual Property. When a new business is created, often it is formed around an idea. That idea blossoms into products, services, processes, marketing, and—hopefully—cash flow! Key to American industry is the idea that “to each will be given according to what he deserves”. And this fundamental mantra is accomplished primarily through intellectual property, which includes trademarks, trade names, copyrights, patents, software, trade secrets, agreements, permits, and more!

How exactly does this work? The argument goes as follows: Business is created and invests funds in making a product. Product has some value (to consumers, businesses, society, whoever). Business sells product for profit. Business’s original investment must be paid off by long-term profit. So, business requires exclusive right to make the product and stop competitors from stealing its ideas (profiting without making investment to make products which have value). Thus, to protect the business and encourage investment, copyright law grants business the exclusive right to its own inventions and creations.

But what many new business owners fail to understand is that almost everything about their new business is intellectual property. Make a new logo? That’s IP. Come up with a new design for your packaging? That’s IP, too. The many new processes and things created by a new business are all intellectual property, but in order for the new business to maintain all of the intellectual property protection, they must first take steps to protect themselves by filing the appropriate forms and ensuring that crucial creations like trade secrets are not leaked. Consulting with a business attorney can help protect intellectual property and, thus, the entrepreneur’s initial financial investments in the new business.

3.      Not Getting Contracts in Writing. It should be no surprise that sometimes contracts are broken. But did you know that some oral contracts may not be enforceable? Furthermore, without a contract, things you agreed to with other companies and people can get lost in translation and may even be forgotten. What happens when you disagree about what you originally contracted for? The number of potential problems and issues are endless, and failure to secure legally-binding, written contracts can spell certain doom for a new business trying to stay ahead of any competitors or other possible startups. Take our advice: work with a transactions attorney to protect your new business.


This article was sponsored by Vlodaver Law Offices, LLC, a business solutions and transactions law firm in the Twin Cities. If you are a new business owner and would like a free legal consultation to get started on the right footing, contact us.


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