12 Legal Mistakes New Businesses Must Avoid in 2020

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New companies often think that the legal aspects are secondary and it is better to leave it for later when the business is already consolidated. Nothing could be more wrong, according to lawyers specializing in entrepreneurship, because failure to attend to these issues from the beginning can jeopardize the viability and future of the company.

We consulted experts about the legal aspects, which in their opinion should be taken into account during the initial phases of a new company. For the experts, these are the questions that an entrepreneur must ask himself in order to avoid mistakes right at the beginning of business:

  1. Is your business model legal, is it regulated or does it require authorization?

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There are many activities that require authorization from government authorities, such as financial, labor intermediation, health, telecommunications, and transportation. It is better to be sure of this before you start and to have to make adjustments on the road, which can be expensive or make the company not viable. If you are not sure to do everything properly, you may need a process server company. Check this website to see which problems companies specialized in that can help you solve.

  1. Are you using the appropriate corporate instruments?

The risk of doing commercial activities in a personal capacity is that your own assets are at stake. For this, there are companies, which allow limiting the commercial risk to the assets and contributions destined exclusively to the company. It is also important to use modern and flexible corporate types.

  1. Are you accessing the tax benefits that the law makes available to you?

Most countries have a series of tax benefits for small companies usually up to 50 workers and limited in assets), which include 0% income tax rates first few years and zero withholding tax for usually for first 5 years. This has a very important effect on cash flow, which tends to be low in the early years.

  1. Are you implementing cost-efficient ways of recruiting talent?

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A new company needs a lot of talent, in fact, the human factor is what is best in a company. However, recruiting qualified people is expensive, especially for a start-up company. For this, there are schemes such as “vesting agreements” or “rights acquisition agreements” that allow small shares to be given gradually over time, which is an important incentive for those whose salary is not so important, but who want to be owners.

  1. Are you using adequate legal structures to obtain financing?

Unless you have assets to back it up, it is very difficult for traditional banks to grant loans to new companies. However, for the first phases, there are seed capital investors and other investors. To link these capitals, there are notes convertible into shares and specialized shareholders’ agreements. Keep in mind that these instruments will be demanding as far as the management of the company is concerned, but they are an important step to access larger investors, such as private equity funds.

  1. Are you protecting the intellectual property and trade secrets of the new company?

Everything that has an intellectual component created within a company, such as literary works, software, graphic designs, etc. It has a moral and economic value and the law gives this protection. However, for the purposes of advertising to third parties, it is important to register these rights with the National Directorate of Copyright.

  1. Are you being careful with your clients’ personal information?

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There are many companies that handle personal information of their clients. This information must be kept in strict reserve, and if it is going to be used commercially, authorization from its owner is required.

  1. Are you exceeding the quality guarantees that you give on your product?

When it comes to companies that are going to market technology platforms, it is important to make the reservation in the contracts with the clients that these are not infallible and that sometimes, they can fail. Otherwise, liability losses can be very large.

  1. Do you have legal instruments to demand your partners abroad?

It is very important that distribution and marketing schemes with companies abroad are recorded in contracts. These contracts will allow demanding rights in any event of default and it is also usual that they contain arbitration clauses abroad for small companies, which allows an agile way of reparation.

  1. Does your business model have reputational risks?

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There are many activities that, although not legally prohibited, can result in being so in people’s perception, such as giving rewards for lost personal belongings. In this case, the management will not be legal, but through media consultancies to transmit the appropriate messages and inform the community.

  1. Articles of incorporation

This legal resource is obligatory for all the companies that want to establish since it proves the legality of its conformation. In this, the most relevant data of the company must be indicated, such as the name, nationality, and domicile of all the people who make up the company.

The constitutive act includes the legal structure of the company. It will specify who constitutes the company. This can be a corporation, a partnership, or sole proprietorship.

In the case of companies or corporations, the investment of each partner must be specified, along with the percentage of earnings, authority, and obligations that they contract. In the case of corporations, shareholders who decide to invest in the company must also be specified in the legal structure with the amount of their investment and the percentage of participation.

  1. Contracts

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Sometimes we collaborate with people with whom we think that it is not necessary to make a contract. It is essential that a contract is signed with all the people with whom we work.

There are different types of contracts. For example, the contract you sign with a client cannot be the same as the one you sign with a collaborator, so we recommend that you consult with an attorney who will help you in drafting these.

If the data of any of the parties involved changed, perform a data update to avoid legal conflicts in the future. As part of these contracts, you must enter into confidentiality contracts in which you give the counterparty confidence that the information specified therein will not be shared or made public.

Conclusion

Be careful to follow all the laws and start your business in the best possible way.

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