Frequently Asked Legal Questions Regarding Startups and Company Formation

What are the legal issues associated with forming a business entity for my startup?

Forming a business entity that fits the unique needs of a venture is one of the most critical aspects of a successful startup. The appropriate business entity for your startup depends on a variety of factors, including the number of people involved, whether or not you are seeking outside investment, and whether it is important to limit your personal liability for any debts the business may incur. Some of the types of business entities commonly utilized by Silicon Valley startups include partnerships, limited liability companies (LLCs), S-corporations, and C-corporations. These entities often require the preparation of a significant amount of paperwork and often have various pros and cons that founders should be certain to fully consider, so it is critical to consult with a Silicon Valley startup lawyer that is familiar with the startup business entity formation.

What are the options for funding a startup?

In any startup, it is extremely important for founders to thoroughly consider all of the options that they have available to them for obtaining funding. There are a number of options available, including issuing equity, borrowing money from traditional sources, crowdfunding, and others. When determining which option is right for your business, you should consider a variety of legal issues, including whether you will personally be liable if the business fails and whether you will have to give up a degree of control over the way that the company is run.

What is Crowdfunding?

Crowdfunding is a type of alternative funding that involves raising money from a large number of small investors, usually through various Internet sites. Legislation recently enacted by the federal government removed some of the restrictions that made it illegal for private businesses to offer equity to anyone but accredited investors in return for funding, making crowdfunding a viable option for startups that once were relegated to traditional funding sources.

How do I determine what business model will work in my situation?

There are many different business models available for any entrepreneur, including a home-based e-Commerce operation, a retail store with a brick-and-mortar location, a tech company with several developers and employees, among many others. The business model you select for your startup should be carefully selected based on the nature of your idea, your capital, time constraints, and ultimate goals for your operation. Your model will help determine your costs, obligations, liability, legal requirements, scope of your operation, and much more. It is important to carefully consider your business model as it relates to your idea, including any foreseeable legal or financial implications.

What legal contracts are important in a startup?

The kinds of contracts that will be important to your startup depend on a variety of factors. Some of the more common contracts used in the early stages of a startup include the following:

  • Commercial lease agreements
  • Employment contracts
  • Operating agreements
  • Service agreements
  • End User License Agreements (EULAs)
  • Non-disclosure agreements
  • Investment term sheets
  • Founder agreements
  • Intellectual property assignments
What legal considerations are involved with making your first hire?

Hiring an employee is a major decision for any company and often triggers a serious of legal obligations that should be considered prior to making your first hire. These include issues related to liability for discrimination, unemployment taxes, workers’ compensation insurance, workplace policies, and many others.

Do I need to be concerned with data privacy laws?

Yes. Data privacy laws apply to any business that has an online presence, and California actually is known for having the most significant and robust privacy protections for Internet users in the country. As a result, anyone operating a commercial website that collects information from visitors should consult with an attorney as soon as possible. Importantly, this law may affect companies that are not physically located in California but have potential clients or customers within the state who visit their website.

What is intellectual property and how can I protect mine?

Intellectual property, or IP, refers to a work or invention that was created by a person’s intellect. IP can refer to creations such as logos, symbols, artistic or literary works, software, processes, manufacturing techniques, sound records, or dramatic works. IP can be protected in a variety of ways, including through the use of copyright, patents, trademarks, and trade secret protections. The type of protection that is appropriate or available to you will depend on the type of IP that you would like to protect.

What are the relevant state and federal laws that I should be concerned about?

Many businesses are subject to various state and federal regulations, and noncompliance with these regulations may result in significant fines or even your business being shut down. For this reason, it is critical for startup founders to discuss their business plans with an attorney that is familiar with the myriad state and federal laws that may apply to their situation.

What is the difference between an independent contractor and an employee?

Many startups hire consultants or other service providers on a per-project basis as independent contractors. The line between employees and independent contractors can become blurred, however, especially in situations in which an individual who has been brought on as a contractor develops a long-term relationship and integral with the company. Generally, whether or not an independent contractor will be deemed an employee in the event of a dispute depends on the degree of control the employer exercises over the way in which the independent contractor performs their work.

If my company consists of me and a close friend or family member, do we really need to sign contracts or have an operating agreement?

Yes. While, in the early stages of a business, “gentleman’s agreements” and other informal understandings may seem sufficient, this can quickly change, particularly if and when large sums of money start to be at stake. As a result, it is always prudent to formalize any agreements in order to avoid any unnecessary conflicts or litigation in the future.

Will I be personally liable for my business debts?

Whether or not a founder will be personally liable for the debts of his or her business depends largely on the type of business entity chosen. An experienced startup lawyer will be able to thoroughly evaluate your risk and determine which type of entity is appropriate in your case.

Where should I incorporate?

The state of incorporation is a major decision that can have an impact on a variety of issues, including filing fees, flexibility of operations, taxation, and the outcome of any litigation that may occur. Many entrepreneurs and founders choose to incorporate in the state of Delaware for a variety of reasons, a decision that may or may not be appropriate in your case.

How will my business be taxed?

There are a number of ways a business can be taxed. Some business entities offer “pass-through” taxation, which means that any profits or losses attributable to the business simply pass through to the owner or owners. This may make sense in some cases while, in others, there may be significant benefits associated with electing to be taxed as a corporation, or simply incorporating.

Do I need a lawyer to start a business?

There is no law that requires startup founders to retain legal counsel or consult with an attorney prior to starting a business. That being said, it is highly advisable to do so and to do so as early in the process as possible. Consulting with an experienced lawyer can help avoid significant issues from arising in the future and can make the entire process much more streamlined than it would be without the assistance of an attorney. In many cases, the cost associated with consulting with a lawyer is offset multiple times over by saving founders time, unnecessary conflict, and the costs associated with completely avoidable litigation or regulatory entanglements.

Contact Startup Company Counsel today to schedule a consultation with a Silicon Valley Startup Attorney

Entrepreneurs and founders who would like further information regarding the answers to the questions posed above or any other questions related to the legal issues with startups should contact Structure Law Group, LLP as soon as possible. To schedule a consultation with one of our lawyers, call our San Jose office today at 855-353-5377.