By: Jordan Gerheim CEO – Outside Chief Legal LLC
Your first year in business is full of complex decisions. Many founders make preventable legal missteps that can threaten their company’s survival, sometimes before it even begins. Here are 10 key mistakes to avoid (and 10 examples of their potential fallout) if you want a strong foundation for growth.
- Failing to Create a Legal Entity
Some startups begin operating without forming any formal business entity. Running as a sole proprietorship or even a general partnership exposes founders to unlimited personal liability, tax complexity, and difficulty raising capital. Proper entity creation, such as an LLC or corporation, gives essential protection, credibility, and structure. Let us help!
Ex: Three friends start a food delivery service but never register as an LLC or corporation. Two years later, a delivery accident leads to a lawsuit that puts their individual homes and personal savings at risk.”
- Choosing the Wrong Business Structure
Even when founders do create a legal entity, picking the wrong type (LLC, corporation, partnership, etc.) can result in higher tax burdens, riskier personal liability, or obstacles to growth. Consult an advisor to match your structure to your goals and to protect assets.
Ex: A startup picks a general partnership for speed and ease only to discover in tax season that they owe twice what they budgeted, and each founder is personally liable for a vendor dispute.
- Skipping Clear Founders’ and Operating Agreements
Without documented founder roles, equity splits, vesting schedules, and procedures for exits, startups invite confusion and disputes. Create operating agreements for LLCs and comparable documentation for partnerships and corporations.
Ex: Co-founders verbally agree on a 50/50 split but never document it. After a year, one tries to leave with company IP and half the revenues, launching a costly legal battle.
- Overlooking Employment Law and Worker Classification
Misclassifying workers (employees vs independent contractors), missing payroll taxes, or neglecting wage laws leads to fines and lawsuits. Every hire should be formally onboarded and in full legal compliance.
Ex: A company hires contractors instead of employees to save on costs, but state regulators reclassify (or correctly classify) them, resulting in back taxes and fines.
- Ignoring Intellectual Property Protection
Not securing trademarks, patents, copyrights, or trade secrets can allow others to copy essential assets, stalling your company and inviting legal trouble. Not including their protection in contractual relationships with internal and external partners. Assign, register and protect IP early.
Ex: A competitor registers a startup’s brand as a trademark first, forcing the business to rebrand after gaining early customer traction.
- Neglecting Licenses, Permits, and Tax Reporting
Operating without mandatory licenses or missing tax registrations results in shutdowns, fines or penalties (or not getting paid for work/services provided). Register as required and file timely reports, even with zero income.
Ex: An app developer launches a mobile app in several states but fails to collect or remit sales tax, facing penalties and emergency shutdowns. Ex No. 2: A contractor fails to obtain required licensure to provide work to homeowner. Dispute arises and homeowner files complaint with licensure board leaving contractor facing fines/penalties and likely not being paid for work done.
- Mixing Personal and Business Finances
Blurring boundaries by commingling accounts weakens liability protection and creates headaches at tax time. Separate and document all business transactions.
Ex: A founder pays business expenses from a personal account, resulting in messy records and a denied business insurance claim after a loss. They could also lose the protections of their “corporate veil” by failing to uphold the corporate formalities – including this one.
- Using Unvetted Online Templates for Contracts
Generic contracts often leave loopholes and may not comply with local laws. Professional review or customization helps secure enforceable agreements.
Ex: Founders download a free partnership contract online that does not comply with their state’s rules or their desired relationship, and later realize they cannot enforce crucial terms when a dispute arises.
- Overlooking Data Privacy and Website Requirements
Missing privacy policies and weak data protection exposes your business to disputes and fines, especially online. Early compliance safeguards your brand.
Ex: A subscription box service collects customer data but ignores privacy laws, leading to customer complaints and a regulatory investigation.
- Failing to Document Equity Grants and Secure Insurance
Without written equity agreements, future fundraising or founder exits create costly disputes. Operating without insurance exposes you to liability for claims, errors, or disasters.
Ex: A team member claims they own company shares promised in an email, but no signed agreement exists. So, a costly legal dispute stalls investment and distracts leadership.
Many founders wait too long to get legal counsel. Early advice helps reduce risk, save money, and lets you focus on growth. Outside Chief Legal helps startups nationwide avoid these preventable mistakes and build resilient businesses. Schedule a consultation or connect with our team to protect your startup and move forward with confidence.
Outside Chief Legal LLC is a trusted partner for founders, business owners, and leadership teams nationwide. Our team brings years of experience advising clients on entity selection, tax strategy, and the legal challenges that come with starting and scaling a business. We offer personalized guidance in LLC formation, incorporation, raising capital, and ongoing business compliance. Learn more about our firm, meet our team, or schedule a Risk-Free Strategy Session to talk with an attorney about the right structure for your company.
