Starting a new business is an exhilarating journey filled with dreams, innovation, and the promise of success.

However, lurking beneath the excitement lies a maze of legal complexities that can trip up even the most passionate entrepreneurs. 

Navigating from compliance to contracts requires more than just enthusiasm; it demands a keen understanding of the legal landscape that shapes your venture.

In this blog, we’ll explore some of the critical legal hurdles every aspiring entrepreneur must tackle to protect their business. 

Whether you’re crafting your first contract or striving for compliance with industry regulations, get started with doola’s formation services to keep your entrepreneurial dreams on track from the start!

What Legal Requirements Do You Need to Follow as a New Entrepreneur?

As a new entrepreneur, you must follow various laws and regulations to operate your business legally and ethically.

Failure to comply with these requirements can result in legal consequences, fines, and even legal charges against your company.

The first step to understanding compliance as a new entrepreneur is identifying the specific legal requirements that apply to your business.

These can vary depending on several factors, such as the type of business you have, your location, and the industry you belong to. 

These legal requirements often cause various challenges for entrepreneurs, ranging from obtaining necessary licenses to protecting intellectual property.

Complying with these regulations will help keep your business on the right side of the law. 

Here are some of the more common and problematic legal challenges faced by new and growing companies. These challenges often occur at the initial formation of the business, in the early stages of growth, and when dealing with employees.

✔️ Making the Deal Clear With Co-Founders

Before jumping into any business venture with co-founders, it is essential to establish clear terms and agreements to avoid any potential legal hurdles.

Not doing so can cause significant legal problems down the road, such as the infamous Zuckerberg/Winklevoss Facebook litigation.

The first step in making the deal clear with co-founders is to have open and honest communication about expectations and responsibilities. This includes discussing roles, contributions, ownership stakes, decision-making power, and exit strategies.

Once you have agreed upon roles and responsibilities with your co-founders, draft a founders’ agreement.

This document outlines all aspects discussed between co-founders, including equity distribution plans, vesting schedules, dispute resolution procedures, confidentiality clauses, non-compete clauses, etc.

A well-drafted Operating Agreement serves as a roadmap for how decisions will be made within the company while minimizing potential conflicts among co-founders.

It also helps protect your interests should there be disagreements or if another party decides to leave the company.

Another crucial aspect of making deals clear with co-founders involves clearly defining each person’s contribution amount (financial or non-financial) towards starting up the business.

This could include initial investments, time commitments, or expertise brought to the table.

Remember that proper documentation and timely legal advice are essential when making deals clear with co-founders to ensure long-term success for your business venture.

✔️ Closing the Funding with Investors

One of the biggest challenges for new entrepreneurs is securing funding from investors to kickstart their business. This process is crucial for the growth and success of any startup. 

However, it can be challenging for first-time entrepreneurs who are not familiar with the legal procedures and guidelines involved in this process.

The first step towards securing funding with investors is to have a solid understanding of your business model, financials, and projected growth potential. Investors are looking for innovative ideas with a clear plan for profitability in the long run.

One of the most common legal hurdles faced by new entrepreneurs is drafting a suitable investment agreement with their investor(s). 

This contract outlines critical terms, such as the amount of capital to be invested in exchange for equity and the level of control or decision-making power to be given to each party.

As a founder, the responsibility falls on you to create company bylaws that outline how decisions will be made within the company after securing the investment; this can help avoid conflicts down the road.

Before signing any agreements or contracts, make sure both parties’ legal counsel thoroughly reviews all terms.

Misunderstandings or disagreements over clauses could lead to disputes and hinder the success of your business.

✔️ Starting the Business as a Corporation or LLC

Since founders often start businesses without legal guidance, they incur higher taxes and become subject to significant liabilities. However, all this could have been avoided if they had structured the business as a corporation or a limited liability company (LLC).

A corporation is a legal entity that is separate from its owners, known as shareholders. This means that the corporation can enter into contracts, own assets, and be sued in its name. It provides limited liability protection to its shareholders. 

This means that if the corporation faces any legal or financial trouble, the personal assets of its shareholders will generally not be at risk. Additionally, corporations have perpetual existence, which means they can exist beyond the lifespan of their founders or initial shareholders. 

They can also raise capital by selling stocks to investors. Another potential benefit of incorporating is credibility—many customers or clients see incorporated businesses as more reliable and professional.

However, forming a corporation requires more paperwork and formalities compared to an LLC. Corporations are required to hold annual meetings, keep accurate records of transactions, and file corporate tax returns separately from individual tax returns.

On the other hand, an LLC combines elements of both partnerships and corporations in terms of flexibility and taxes. Like a corporation, owners (known as members) receive limited liability protection for business debts and obligations. 

So, your personal assets are protected against any claims made against the company. Unlike corporations, however, LLCs do not need annual meetings or extensive record-keeping requirements.

Another advantage is that LLCs have greater flexibility when it comes to taxation since they can choose how they want to be taxed—as sole proprietorships/partnerships or S-Corporations/C-Corporations, depending on their specific needs. 

So whether you incorporate your business as an LLC or C-corp, you must file various legal forms and documents with appropriate state authorities. 

This way, we can ensure that you won’t have to jump through multiple legal hoops to utilize liability protection from business creditors, tax savings through deductions and other benefits only available to corporations, like ease in raising capital.

doola formation services will help you choose the suitable entity type for your business, choose the best state for incorporation, and even fulfill all the legal obligations on your behalf.

✔️ Getting the Cap Table Right

For new entrepreneurs, getting the cap table right can be challenging, but it can also have significant consequences if not done correctly. A cap table is a document that outlines a company’s ownership and equity breakdown.

Many startup founders make the mistake of issuing shares without keeping proper records or using outdated spreadsheets, which can lead to discrepancies and disputes later on.

To avoid errors, it’s best to use a dedicated person or legal counsel to manage cap tables.

Next, it’s crucial to categorize different types of securities separately on your cap table. For instance, common stocks should be separate from preferred stocks, with different classes or series clearly identified.

This differentiation helps calculate each shareholder’s economic interest accurately.

Another important tip is to update your cap table regularly as new equity transactions occur. Whether it’s issuing new shares or buying back existing ones, these changes need to be reflected on the cap table accurately and promptly to maintain its validity.

Having an organized and accurate cap table also helps when seeking investment from venture capitalists or angel investors.

It showcases your company’s ownership structure, highlights the potential dilution of existing shareholders, and provides a clear understanding of each share value.

✔️ Choosing a Company Name

Your company name controls the first impression customers will have of your brand and can play a significant role in your overall success. However, while brainstorming potential names for your business, several legal challenges will come your way.

The first legal issue when deciding on a company name is trademark issues. A trademark is a legally protected design, symbol, or phrase that identifies a specific product or service. It’s essential to ensure that the name doesn’t infringe on any existing trademarks.

If you accidentally choose a name that is too similar to an existing trademarked business name, you could face legal repercussions and be forced to change your company’s name further down the line.

To avoid this issue, conduct thorough research on existing trademarks before finalizing your company name. You can check with the United States Patent and Trademark Office (USPTO) or hire an attorney to do a more comprehensive search for you.

Another challenge faced by new entrepreneurs when choosing their company name is domain availability. Your website address should ideally match your company’s name as closely as possible. 

Before settling on a company name, check if the corresponding domain is available for purchase. You can use domain registration websites like GoDaddy to search for available domains within minutes.

✔️ Complying With Securities Laws

Securities laws regulate the sale and issuance of stocks and other investment vehicles. They are designed to protect investors from fraud and ensure transparency in the marketplace.

So, it is your responsibility to comply with these laws when issuing stock to angels, family, or friends.

First and foremost, you need to determine whether your stock offering qualifies as a private placement under securities laws. Private placements are exempt from registration requirements with the Securities and Exchange Commission (SEC). 

Generally, a private placement involves a limited number of investors who have pre-existing relationships or sophistication in understanding investment risks. If your offering does not qualify as a private placement, then you will need to register your stock offering with the SEC by filing a registration statement known as Form S-1. 

This process can be time-consuming and complex for first-time founders. It is therefore recommended that entrepreneurs consult a legal professional from Rocket Lawyer, who is experienced in securities law, before proceeding with this route.z

✔️ Taking Important Business Licenses Into Account 

One of the most crucial aspects of starting a business is obtaining all necessary licenses and permits. Failure to comply with these regulations can result in hefty fines, legal consequences, and even the shutdown of your business.

The first step in obtaining essential business licenses is registering your business with the government. This process establishes your company as a legal entity and enables you to participate in commerce within your state or country. 

Depending on where you operate, this may involve registering a trademark for your business name or obtaining a tax ID or Employer Identification Number (EIN).

If your business operates in certain industries, you may also need to obtain professional licenses before offering services or products to the public. These can include real estate agents, lawyers, doctors, accountants, etc.

New entrepreneurs need to research which licenses are needed for their specific industry and any federal laws that apply since these requirements vary from state to state and country to country.

By taking the time to research and obtain these important licenses, you are not only protecting your company’s reputation but also ensuring its long-term success.

✔️ Intellectual Property Issues

Intellectual property (IP) is a crucial aspect that new entrepreneurs must consider when starting their businesses. It refers to any intangible creations of the human mind, such as inventions, designs, symbols, names, and images used in commerce. 

One of the main challenges for new entrepreneurs regarding intellectual property is understanding what needs to be protected and how to do so. Various types of IP protections are available, including patents, trademarks, copyrights, and trade secrets. 

For instance, if you have developed a unique product or process that provides a technical solution to a problem or meets a specific need, consider obtaining a patent. This will give you exclusive rights to use and commercialize your invention for up to 20 years. 

However, obtaining a patent can be a complex process that involves extensive research and documentation. Therefore, it is advisable to seek professional legal advice from an experienced attorney who specializes in IP law.

Failing to protect intellectual property can result in significant financial losses and damage to a brand’s reputation. Seeking professional legal advice is critical in ensuring your business has adequate IP protection from the start.

✔️ Drafting Iron-Clad Contracts

A solid contract not only protects your rights and interests but also ensures that all parties involved are on the same page about their obligations and expectations. 

However, it can be overwhelming to navigate the legal jargon and create an ironclad contract that covers all bases.

It is crucial to identify all parties involved in the agreement accurately. This includes not just individuals but also any companies or organizations represented.

List down their full names, titles, and contact information so that they can be held accountable if necessary.

A contract should include a detailed description of the products or services to be provided. It should also outline specific deliverables, timelines, quality standards, and any other expectations from both parties.

Clearly outline how much money is due for the work completed or services rendered under the agreement. State when payments are expected to be made, what forms of payment are acceptable, and whether there will be late fees or interest charges for delayed payments.

If your business involves sensitive information, such as trade secrets or intellectual property rights, shared with another party under the agreement, make sure to include strict confidentiality clauses that prohibit them from sharing this information with third parties without your consent.

No matter how well-drafted a contract is, disputes may still arise between parties. A dispute resolution clause that outlines the procedure for resolving any conflicts or breaches of the contract is essential.

Remember to get professional legal aid when needed, and never rush through this process. An effective contract can save you from significant legal hurdles in the future.

✔️ Hiring and Firing an Employee

As a new entrepreneur, taking the proper steps before hiring and firing an employee can protect your business and your employees from potential legal issues.

Once you have selected a candidate for employment, make sure to provide them with an official offer letter or contract outlining the terms and conditions of employment.

This document serves as written evidence of the agreement between you and your employee and can help avoid any disputes in the future.

On the other hand, it is crucial to do so thoughtfully and lawfully when considering terminating an employee’s contract. Before taking steps towards termination, try to address any performance issues through coaching or providing resources for improvement. 

When faced with the need for termination, it is crucial to do so in a respectful manner and adhere to any contractual agreements.

This includes providing proper notice or severance pay as outlined in the employment contract or local labor laws.

doola to the Rescue: Invest in Proper Planning and Obtain Expert Advice

Founders who manage to avoid these legal challenges and missteps have a better shot at success than companies that fail to anticipate and plan for them from the beginning. This is where doola can be an invaluable resource for new entrepreneurs.

Get started with our Total Compliance Solution to get a comprehensive overview of all the laws and regulations you need to adhere to in order to avoid costly mistakes. This not only saves time but also ensures that all required paperwork is filed accurately and on time. 

Our legal and tax experts will guide you through every step, from drafting an Operating Agreement to obtaining an EIN, ensuring that you have all the necessary documents and permits to operate your business legally.

By delegating this task to experts, you can focus on growing your businesses without worrying about failing to meet legal regulations.