3 Big Mistakes That Startups Need to Avoid

July 30, 2015

When consulting with startup business owners and entrepreneurs, common issues arise regarding key elements of the business and its structure. These issues can expose the business, and the owners, to unnecessary litigation and other legal expenses. Below are three common mistakes that startup businesses make and how you can avoid them.

Failing to Use and Maintain Proper Employment Documentation

We’ve all heard the stories about businesses getting started in a parent’s garage and suddenly becoming a multi-million dollar success. However, as the business grows, there has to be a protocol in place for hiring new employees and what employment status they have with the business. Unfortunately, many startups encounter problems when they fail to maintain proper employment documentation exposing the founders to lawsuits if an employee feels they get short-changed in terms of pay, benefits, title, equity, etc.

Business startups need to have a core set of employment documents that should be signed by employees at the time they are hired. This core set of documents should include:

  • IRS Form W-4 – having this document in place will save both you and your employees major headaches come tax time.
  • Stock option documents (e.g., a Stock Incentive Plan, Notice of Stock Option Grant, Option Agreement, etc.) – one of the key benefits of joining, and working for, a startup is the possibility that the stock of the company will increase exponentially in value. Stock options can be a key selling point to recruiting talent, so it must be made clear, at the beginning, what each employee is getting, if any, in stock options.
  • “At-will” employment documentation – this should be included in your offer letter and signed by the company and the prospective employee. This is vitally important since it sets forth, in clear terms, that employment can be terminated “at-will” rather than creating an implied, potentially long-term employment contract.
  • USCIS Form I-9 – this is key document to ensure that the identity of the new employee is legitimate.
  • Benefit forms – like stock options, benefits are a key recruiting tool for new talent. This is why you need documentation spelling out available benefits to employees and family members (e.g., health insurance, dental insurance, vision insurance, retirement program, etc.) and when those benefits begin.

Failing to Protect the Intellectual Property of the Business

If you have developed a unique product, technology, or service, you need to protect the intellectual property of that product, technology, or service. This means you need to assess whether you need to apply for a patent, get a work copyrighted, and/or have a logo trademarked.

Failing to Stay on Top of Tax Issues

When you start a business, tax issues must be considered and addressed. The IRS does not give much weight to claims of ignorance. Common tax issues that startup businesses run into is the choice of legal entity for the business. You have various options such as a limited liability company, an S corporation, a C corporation, etc.

If you are selling a product, you need to collect sales tax on each sale. Failing to do so can have disastrous consequences. This issue is compounded if the company is selling in multiple states. Along with sales tax, you must consider payroll tax, real estate taxes (if you own a brick and mortar business), and an array of other potential taxes, depending on the type of business you own.

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