Marketing entrepreneurs’ greatest strengths are their creativity and vision. It is this vision that drives many to take the leap to start their own agency/consultancy or join a start-up venture to market an exciting new product. Unfortunately, most marketers are not well-versed in the intricate legal issues involved with starting a business. This can lead to a variety of problems, especially as the venture begins to become successful. A common misconception is that good legal advice is often too expensive for the early stages of a business venture. This is not the case – provided the right counsel is selected. To ensure the success of any new venture, marketers should take steps to avoid the following common pitfalls:
- Delaying discussion of legal issues until past the start-up phase. It’s all too common (and tempting) to ignore legal issues involved with starting a business. The instinct is to wait until your company receives additional funding or has a problem to hire an attorney. But having legal counsel during the start-up is essential to preventing large and costly problems that could ultimately derail your business.
- Initial business formation. Entrepreneurs are often not aware of the different tax filing categories. LLC, S-corporation and C-corporation are the most common, but there are others. Each has a different structure and design, with different tax consequences. As the company founder, you should sit down with an attorney to determine which structure is best for your business. Failure to do so may result in higher taxes and expose you to additional liabilities. Choosing the correct structure can result in significant savings, a more robust investment platform and a more secure future.
- Forgotten founder problem. Many companies in the start-up phase have multiple people contributing their ideas and advice. While these individuals may have been forgotten about by the company, these contributors never forget and will expect to be compensated when you start showing success. Having a very clear ownership structure early on can avoid unexpected requests for distributions or ownership interests.
- Hiring employees. Once your company gets off the ground, you will need to hire employees. Among the legal issues that need to be considered are whether a hired individual is a full-time employee or an independent contractor. This critical distinction sets off a domino effect of items that need to addressed, including but not limited to employee health insurance, general liability insurance, employment disclosures, ADA requirements, tax withholding issues, non-compete/non-solicitation agreements and decisions regarding the scope of employment. These problem areas can and should be addressed with little expense, provided the right business attorney is retained.
- Customer and vendor relationships. Before signing on any client or working with a vendor, you need to be diligent about clearly defining the scope of work, action items, deliverables and payment terms, as well as what constitutes default. Failure to do this can result in promising a broader scope of work than you can handle and/or potential payment disputes. You will need someone experienced in drafting and reviewing contracts to guide you through the process. It is not expensive, but if you do it wrong, the resulting problems can be expensive to fix.
Bonus Pitfall: Intellectual property. It’s common in the early stages of a new venture for the founders to delay filing for a patent for their new product or idea. It’s also common for entrepreneurs to be excited about their business and growth potential and share their excitement with others. Unfortunately, all too often, someone else senses a great opportunity and files for the patent themselves. Now your invention is in someone else’s name. It is critical to have an attorney advise you on when to file for a patent to avoid having someone else beat you to it.
While legal concerns tend not to be the first, or even the second, item on an entrepreneur’s checklist, addressing them is essential for success. Hiring an attorney should be at the top of any new business owner’s agenda. Equally important is to hire the right attorney – specifically, one who dedicates a significant portion of his/her practice to strategy and guidance for emerging businesses and entrepreneurs. Check with the executive director of your local start-up incubator or colleagues who have forged the pathway of business formation for recommendations.
The author, Mark Edelson, is the General Counsel to the Baltimore Chapter of the American Marketing Association and a Member in the Business Litigation Group at Silverman Thompson Slutkin and White, and can be reached by email here.