13 Step Legal Checklist For Launching A Startup

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According to a publication by Entrepreneur, some of the common legal challenges startups and small businesses face include intellectual property (IP) ownership conflicts, improperly documented equity agreements, employment law compliance, contractual issues, and regulatory compliance [1].

With adequate knowledge and solid legal counsel, you can navigate the complexities of launching your startup without dealing with legal issues during the process or in the future. That’s why this article will point you in the right direction and help you avoid those pitfalls.

1. Choose the right business structure

Choosing the right business structure for your startup is crucial as it defines your company’s legal and financial framework. A Limited Liability Company (LLC) offers personal liability protection while maintaining pass-through taxation, making it ideal for small businesses seeking flexibility and reduced administrative burden.

Alternatively, forming a corporation (C-Corp or S-Corp) provides strong liability protection and facilitates easier access to capital through stock issuance, suitable for startups anticipating rapid growth and external investment.

Sole proprietorships and partnerships offer simplicity but expose owners to unlimited liability, limiting their suitability for ventures aiming for substantial growth and asset protection. Assessing these factors in alignment with your startup’s goals and plans is essential to selecting the most appropriate structure.

2. Registering the business and acquiring your EIN

Registering your business is a fundamental step that establishes its legal existence and enables compliance with regulatory requirements. Here are the key steps involved:

  • Choose a Business Name
  • Check Name Availability: Verify the availability of your chosen business name with the state’s business entity registry or the Secretary of State’s office.
  • File Necessary Documents
  • Pay Filing Fees:
  • Obtain Employer Identification Number (EIN): You’ll need an employer identification number for federal tax purposes and when you start to employ staff. You’ll need the social security number of the person completing the form. You can apply through the online application on the IRS website.
  • Register for State Taxes
  • Obtain Necessary Licenses and Permits
  • Register for Sales Tax
  • Foreign Qualification
  • Publish Notice (if required)

Registering your business ensures compliance with legal and tax obligations, establishes credibility with customers and partners, and protects your personal assets by creating a separate legal entity for your business activities.

3. Drafting a founders’ agreement

Drafting a founders’ agreement is critical for aligning expectations, resolving conflicts, and protecting the interests of all startup founders. This document outlines key aspects such as each founder’s roles and responsibilities, ownership percentages,  decision-making processes, and procedures for resolving disputes or handling the departure of a founder.

Importantly, it addresses the equity vesting schedule which states that stock ownership will vest over time. The vesting schedule helps prevent founders and investors or employees from immediately selling all of their stock as soon as they receive it.

It also addresses how intellectual property (IP) rights will be managed and assigns responsibilities for funding and financial management. By establishing these terms early on, founders can mitigate potential disagreements and establish a clear framework for the startup’s governance and operational decisions.

4. Protecting intellectual property (IP)

Take advantage of intellectual property law to protect ideas, trade secrets, and inventions (if any). Protecting intellectual property (IP) is vital for startups to safeguard their innovations, brands, and creative works. Key strategies include:

  • Identify and categorize your IP assets, including patents for inventions, trademarks for branding, copyrights for creative works, and trade secrets for confidential information.
  • File for legal protection where applicable, such as registering trademarks with the USPTO or copyrighting original works with the Copyright Office.
  • Use non-disclosure agreements (NDAs) with employees, contractors, and partners to protect trade secrets and confidential information.
  • Ensure that employment contracts and agreements with contractors include provisions for assigning IP rights to the company.
  • Regularly monitor the marketplace for unauthorized use of your IP and take prompt legal action when necessary to enforce your rights.
  • Consider international IP protection through treaties and registration processes in key markets where your business operates or intends to expand.
  • Develop a comprehensive IP strategy aligned with your business goals, which may include licensing IP to generate revenue or using it defensively to protect against litigation.

These measures can enhance your startup’s competitiveness, attract investors, and maintain control over its innovative ideas and brand identity in a global marketplace.

5. Creating bylaws or an operating agreement

Bylaws and operating agreements help you structure the internal governance and operational procedures of your startup, depending on whether you choose a corporation or LLC.

Bylaws for corporations establish rules for shareholder rights, board responsibilities, meeting protocols, and decision-making processes, ensuring compliance with state corporate laws and providing a framework for effective management and investor confidence.

Conversely, an operating agreement for LLCs defines ownership interests, member roles, profit distribution, and management procedures, offering flexibility to customize rules to fit the LLC’s specific needs and preferences.

6. Complying with employment laws and employment agreements

Complying with employment laws is essential for startups to cultivate a positive work environment, avoid legal issues, and ensure fair treatment of employees.

This involves:

  • Adhering to Equal Employment Opportunity (EEO) laws to prevent discrimination
  • Complying with the Fair Labor Standards Act (FLSA) for fair wages and hours
  • Correctly classifying workers according to IRS guidelines
  • Maintaining a safe workplace per OSHA standards
  • Providing mandatory benefits like workers’ compensation and health insurance
  • Supporting employees with Family and Medical Leave Act (FMLA) provisions
  • Establishing clear workplace policies in an employee handbook
  • Offering regular compliance training
  • Keeping accurate employee records
  • Consulting with employment law experts to stay updated on regulations and best practices

As a new business owner, you want to make sure that each person who works for your company has a great experience and is not deprived of their legal rights as this can damage your reputation and lock you into multiple litigations.

7. Ensure tax compliance for the startup

Ensuring tax compliance is a foundational responsibility for startups to avoid penalties, maintain financial health, and foster trust with stakeholders.

  • Register for Taxes
  • Income Tax Filings: Properly file your business tax returns and on time, including federal, state, and local income tax returns.
  • Sales Tax Compliance: Register with state revenue departments to collect and remit sales tax, ensuring compliance with varying rates and regulations across jurisdictions.
  • Employee Taxes
  • Quarterly Estimated Taxes
  • State and Local Taxes
  • Accounting Accuracy: Maintain accurate financial records, track expenses, and keep receipts to substantiate deductions, facilitating easier tax preparation and audit readiness.
  • Tax Credits and Deductions

By prioritizing tax compliance, startups can minimize financial risks, allocate resources effectively, and focus on achieving sustainable growth while building a solid foundation for long-term success.

8. Securing appropriate insurance for your small business

Securing insurance for a startup provides financial protection against various risks and liabilities, ensuring business continuity and stability in the face of unexpected events. It also enhances credibility with clients, partners, and investors, demonstrating a commitment to responsible and sustainable business practices.

Here are the key types of insurance to consider:

  • General Liability Insurance: Covers legal claims for bodily injury, property damage, and personal injury. While it’s important to make sure you’re compliant with the law, general liability insurance will cover unforeseen legal situations.
  • Professional Liability Insurance (E&O): Protects against claims of negligence, misrepresentation, or inadequate work for service-based businesses.
  • Property Insurance
  • Workers’ Compensation Insurance
  • Cyber Liability Insurance
  • Business Interruption Insurance

9. Drafting essential contracts and agreements

When starting a business, drafting essential contracts and agreements is crucial. This includes employment contracts, vendor agreements, non-disclosure/non-compete clauses, and partnership/shareholder documents.

10. Addressing data privacy and security

Addressing data privacy and security is a critical step that involves implementing robust policies and safeguards to protect sensitive customer, employee, and company information.

You should consult with IT and legal experts to ensure compliance with relevant data protection regulations, secure systems and networks, and develop incident response plans. Proactively addressing data privacy and security is essential for maintaining customer trust, mitigating risks, and positioning the business for long-term success.

11. Preparing for fundraising and finding investors

Preparing for fundraising and securing strategic investors should be a top priority. Crafting a well-researched business plan, prepared financial projections, and a compelling investor pitch deck are essential tools to captivate potential backers.

Thoroughly investigate the appropriate funding sources, whether that be angel investors, venture capitalists, or alternative financing options. Approach this critical step with the utmost professionalism and strategic focus – it will be a pivotal determinant of your startup’s trajectory and long-term success.

12. Setting up financial systems

Establishing sound financial systems is a critical early step when starting a new business. This includes setting up banking and payment processing, implementing accounting software, and defining financial controls and reporting procedures.

Investing time and resources into building a robust financial foundation sets the stage for the business to maintain financial health and achieve long-term success.

13. Seek legal counsel

With the right attorneys on your side, you’ll never have to worry about getting the steps wrong. Knowledgeable attorneys will help you through the process and provide legal resources and insights into the benefits and pitfalls of each of the above-listed steps.

Expert attorneys at Calkins Law Firm are dedicated to handling everything to make your startup legal. We’ll take care of contract laws, shareholder agreements, privacy policies, and other legal requirements.

We’re not just lawyers, consider us your partner in this exciting new journey. We charge a competitive fee for the quality of service we render and it’s worth avoiding any legal trouble.

Speak with us to discuss launching your startup with complete confidence and peace of mind.

Final Note

Establishing a solid legal foundation is crucial when launching a new startup. By attentively addressing entity formation, governing documents, data privacy, financial systems, and capital raising, you can fortify your business against potential obstacles and position it for long-term success.

While these upfront legal preparations require significant time and resources, they are an invaluable investment in the future of the venture. With a vigilant approach and qualified legal counsel, you can navigate the entrepreneurial journey with confidence, capitalizing on every opportunity for growth and prosperity.