3 Legal Traps That Can Be Avoided When Starting a Company


As opposed to a legal hurdle, where a business owner can see a risk coming and prepare for it, a legal trap lays in wait for the unsuspecting owner. This article will address three traps that many owners find themselves in, and how to best avoid them.

Trap 1: Not Strategically Forming the Company

This first trap is unique in that the owner will not know they stepped into the risk until a later time when its poison hurts a business deal or relationship. Many owners form their entity in a cost-efficient manner. From a business lens, this is the most logical decision. However, from a legal lens, it is imperative to set the foundation of your entity with the future in mind. For example, the owner should carefully consider what type of entity they need, and what state they want their entity to be formed in. Additionally, the owner needs to have ironclad governing documents between the founders and other investors to ensure everyone’s rights and responsibilities are clearly defined, and more importantly, protected.

Trap 2: Not Protecting Intellectual Property

The second trap is deeper than it appears. Many owners are acutely aware of the fact that they need work-for-hire, nondisclosure, confidentiality, and non-compete agreements. The trap springs when the owner selects an agreement that does not adequately protect the company and its employees. It is very difficult to enforce these agreements retroactively to correct an initially flawed (or nonexistent) agreement. More specifically, if agreements are not in place to protect the intellectual property of the company, or the workers of the company, then someone else can poach your employee and, legally, use your hard work.

Trap 3: Assuming Legal Issues Can Easily Be Addressed Later

The third, and final, trap is the most common we see with business owners. Many people call an attorney when they need help, rather than to prepare to avoid certain issues altogether. Although it is possible that if a business owner falls into Trap 1 or Trap 2 above an attorney could remedy or reduce their issue, it will be significantly more expensive and time consuming than if the Traps were addressed proactively. Both traps have ripple effects. For example, if the bylaws or company agreement do not adequately and accurately protect the founder and investors, then rewriting that agreement could cause different leadership or different strategies to be implemented. Or, if there is a defective non-disclosure agreement in place, an employee may be able to claim ownership of your intellectual property or use it exclusively themselves. Now an attorney will have to fight for your intellectual property back.

In conclusion, if an owner is aware of these traps they can be avoided rather easily with the right preparation. Business owners fare better when they think twice about these traps, and only have to pay an attorney once. It is almost always the case that an attorney is more cost effective on the front end, rather than the back. If you prefer an analogy; Armor for your business is cheaper than surgery. Be proactive. Add a trusted legal advisor to your team today, call The South Texas Business Lawyers.

Written by: Connor McQuage

Disclaimer: This article is made available for educational purposes only, to give you general information and a general understanding of the law, not to provide specific legal advice. By using this article, you understand and acknowledge that no attorney-client relationship is formed between you and MSD Law PLLC, nor should any such relationship be implied. This article should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.

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