By: Marcus J. Kocmur, Partner

April 2015

For most startups and small businesses, capital allocations and budgeting are important. Allocations need to be made between what must be paid today and what can be pushed off for the future. Founders are understandably focused on research, development, sales, and marketing, but neglecting your legal foundations can create headaches down the road. Plan ahead to avoid as many of these common mistakes as you can afford.

1. Not getting everyone on the same page from the word “Go.” Business plans seem to have fallen out of favor now that everyone is busy “pivoting,” but if you have a partner or co-founders, you can head off a lot of problems down the road by making a simple list of the key terms of your responsibilities to the business and to each other early on. If need be, you can review and refocus as the business evolves. In the meanwhile you have clarity.
2. Not finding a good lawyer and a good accountant, and making use of them. Service professionals with whom you have a good rapport, and that return your calls promptly, are invaluable. Find someone who wants to know your business as well as you do and you’ll have much more than someone who crunches the numbers or reviews contracts.
3. Picking a name with issues. With every marketing dollar and every sale, you are working on building your brand and your good will. A lot of hard work can go down the drain if you run into trademark infringement or domain name problems. Don’t get too attached until you have searched online. Search web domains tools and, if the name you are contemplating is available, grab it. Your lawyer can also help you research the U.S. Patent and Trademark Office to see if there is someone without a web presence that might have a prior trademark.
4. Not protecting your intellectual property. Most businesses are not based around patentable inventions, but every business has hopes to build value in its brand. The value of a work, name, or symbol that is used to identify your product or service and distinguish it from others, can be protected through federal and state trademark registrations. Non-disclosure agreements with potential business partners, as well as confidentiality agreements and trade secret policies with employees and vendors, help to protect your investment in your business.
5. Not starting the business as a corporation or LLC. Because your business will have outside investors, because you want to sell it someday, or because you have other personal assets other than the business are each a good reason to structure your business as a corporation or an LLC. Sole proprietorships and partnership can be converted into corporations or LLCs down the road, but conversions can be costly. Corporate and LLC entities generally offer significant upsides for founders, including enhanced liability protection and potential tax savings.
6. Not developing “standard” transaction documents that are written in clear language and are favorable for your business. Whether your business will interact with its customers through a custom contract, a purchase order, or click-through terms and conditions, every contract can be tailored to make it more favorable to one side than the other. Do-it-yourself legal sites can’t do this for you, and they can’t bring their background knowledge of you and your business to have a custom, focused contract that meets your specific needs. Whenever possible, you want to start with your own “standard” contract that is favorable to you, and negotiate from that position of strength.
7. Not developing a core set of employment documents and policies as early as possible in the expansion of your workforce. Inadequate employment documentation and relaxed policies on employee timecards are areas that have a high risk of costly litigation with disgruntled former employees, especially in California.
8. Not making sure you comply with securities laws (even if your investors are “just friends and family”). Bringing in investors means you’re selling someone an investment and such sales are heavily regulated by state and federal law. Care must be taken to comply, or there is a risk of losing everything, with a personal obligation to refund investments.
9. Not buying the right insurance, in the right amounts. Commercial general liability insurance, workers compensation, and specific insurance for your business, are must-haves. Proper insurance is the best way business owners and operators can protect themselves from unforeseen risks.
10. Not planning to pay taxes. In addition to paying state and federal income tax and any state franchise tax applicable to a particular entity, many businesses are responsible for sales taxes on goods, and payroll and other taxes for employees. Again, hire a good CPA to help with your compliance.

                                                                                                                                              Marcus J. Kocmur, Partner

                                                                                                                                              MKocmur@BFASLaw.com

                                                                                (Direct) 805.966.7715

© 2015 Buynak, Fauver, Archbald & Spray, LLP

DISCLAIMER:  This Advisor is one of a series of business, real estate, employment and tax advisories prepared by the attorneys at Buynak, Fauver, Archbald & Spray, LLP. This Advisor is not exhaustive, nor is it legal advice. You should discuss your particular situation with us or with your own attorney. Our legal representation is only undertaken through a written engagement letter and not by the distribution of this legal Advisor.