6 Legal Matters You Should Tackle at Startup

There’s no shortage of things to do in the days after you decide to go into business for yourself. Your list will include big decisions such as what your company will do and be called, where it will operate from, and so on.

In these heady, possibility-filled days, legal matters aren’t usually top of mind. But getting the right documents and systems in place at the beginning can save you a lot of expense and hassle later on.

Over the last couple of years, Fogler Rubinoff LLP partner Matt Norris has helped a new cohort of entrepreneurs start companies. A lot of these startups have built significant public profiles. That’s a good way to attract business, but it also has downsides. “It opens you up to possible claims,” he notes. When a startup gains traction, people begin to emerge from the woodwork—unhappy customers, jilted former workers, or patent trolls claiming your intellectual property as their own. In each case, having legal defences can go a long way to ensuring you live to do business another day,

Here are six legal matters Norris says startups need to tackle as early as possible.

1. Incorporation

Entrepreneurs—particularly those going solo—often skip the lucrative and risk-reducing step of incorporating. That’s a mistake, says Norris. “What a corporation does, versus some of the other business entities, [is] it allows you to [limit] liability to the assets of the company,” he explains. “So it insulates the founders from any personal liability.” (The exception is a personal guarantee offered to secure a bank loan in lieu of company assets; in that case forming a corporation doesn’t limit liability to creditors, but “still insulates you from the public”).

Most companies eventually need to raise money, and incorporating can make attracting outside investors easier. It also simplifies tax planning, and may help to reduce the amount you have to pay by enabling income-splitting.

“You can always convert to other business entities at a later date,” notes Norris. “But the sooner you [incorporate], it kind of limits your tax and legal expenses that go with converting down the line.”

2. Shareholders’ Agreement

Founders used to operating on a handshake don’t always see the need for a formal document outlining their rights and duties. “But when you get into business—especially if you’re going to be successful down the road—you’re going to run into issues around ownership, commitment, management decisions, and [eventually] buying and selling the business,” says Norris. A shareholders’ agreement addresses these issues