What is startup law?
When startup businesses form, seeking legal counsel is often the last thing on the to-do list. First is the business model; second is selling product; and third is growth. However, it is extremely important to have a skilled startup lawyer to act as outside general counsel throughout the company’s lifecycle. At Montague Law, our startup lawyers guide clients in a variety of ways including the formation of the business; raising capital from angel investors and venture capitalists; advising on legal and business issues as the startup scales; and even helping to facilitate a M&A or taking the company public in an initial public offering (IPO).
Why do I need legal guidance on my startup business?
At any point in the lifecycle of a startup business, a startup lawyer will bring value. Here are a few instances where you’ll find an immediate and long-term benefit of legal counsel.
If your startup business either operates on or has a unique intellectual property (IP) such as trademarks, patents, copyrights, and trade secrets, then it is important to protect that IP. You do not have to register trademarks or copyrights to protect them, however, it does afford you more rights. If your startup has a patent, then it is a must to register it. With the right startup lawyer to guide you in this process you will not have to be concerned with legally owning your IP. If a registered IP were to come into question or was stolen/copied, a lawyer can assist in perusing legal action in this instance. On the other side, should your company receive a cease and desist in regard to your business’ IP or lack thereof, it will most likely be necessary to obtain legal counsel.
In some instances, you may not need legal advice when you create your startup business but if your startup has founders and investors, it is advisable to have equity rights outlined legally. Additionally, a lawyer could guide you on the best strategy depending on the startup corporate structure and/or place of corporation.
The finance technology (FinTech) industry has completely disrupted the ways businesses are funded, run, sold, and bought. FinTech like crypto and blockchain technology is constantly evolving. As this industry evolves much of it is decentralized and unregulated while there are other instances where companies need to follow SEC regulations. At Montague Law, we specialize in blockchain and cryptocurrency regulations. Contact us if there is any compliance uncertainty when operating your business. If your startup is in the realm of any other type of business disruption, you’ll want to contact a startup lawyer to understand what laws, policies, and tax regulations you need to follow.
Whether your startup is receiving funding from a venture capitalist, angel investor, or financial institution, it is vital that your business stay financially sound, and you maintain a level of equity you are comfortable with. Investors have a different agenda than you have for your startup business. It’s important to ensure each party is benefiting from the investment.
Additionally, if you are receiving funding from investors in exchange for securities (convertible notes, stocks, stock options, etc.) then you must comply with securities laws and regulations. Those securities must be registered with the Securities and Exchange Commission (SEC) unless exempt. A skilled lawyer who specializes in securities can assist with this very complicated and time-consuming registration process.
What are the legal requirements to beginning a startup?
There are a number of steps any entrepreneur needs to follow and comply with to legally begin a startup business. Startup lawyers can assist with these steps as well as provide guidance on the appropriate licenses and permits required federally, by state, and by county/city.
- Identify your business location. Depending on the type of startup you are establishing whether it be online or brick-and-mortar, you’ll need to decide on the location, specifically the state and county/city your business will be located in. The location of the business will determine the taxes paid, licensing and permits, and other specific legal requirements as outlined by the state and county/city of the business location.
- Register for the business structure. You will need to decide on a business structure of your startup and then registered it. Depending on the structure of business will guide the startup in taxes owed, business operations, personal assets that could be at risk, and legal protections. Examples of business structures are Sole Proprietorship, Partnership (Limited Partnership (LP) and Limited Liability Partnership (LLP), Limited Liability Company (LLC), Corporation (C Corporation, S Corporation, B Corporation, Close Corporation, Nonprofit Corporation), and Cooperative.
- Register the startup business name. There are a number of different ways a startup can and should register its name including as an entity name that is protected at the state level, trademark the name at the federal level, purchase a domain name for the business website, and a Doing Business As (DBA) is a fictitious, tradename, or assumed name that can be registered with the state, country or city of your business location. A DBA may provide legal protection especially from IP infringement depending on the location of the business.
- Apply for an EIN. An Employer Identification Number (EIN) is a federal tax identification number required of all businesses to be able to pay federal taxes, apply for business licenses, hire and pay employees, and open business bank accounts. An EIN can be obtained by application through the IRS.
- Apply for a state tax ID number. Not every U.S. state requires a startup to apply for a state tax ID. State tax IDs are only required if that state the startup is registered in requires business taxes.
- Apply for business permits and licenses. Depending on the goods or services your startup provides will indicate the type of business permits and licenses necessary to operate federally, by state, and in accordance with the city or county the startup is registered in.
- Open a business bank account. It’s essential to separate your personal bank account and assets from the startup business bank accounts. Any new business owner will want to create a business bank account to avoid certain types of financial liabilities, avoid risk of legal action that could potentially expose personal financial records, and to keep taxes separate and uncomplicated. To do so, you’ll need to provide an EIN, business formation documents, licenses, and other legal documentation.
- Protect your Intellectual Property. Intellectual property (IP) is a business’ trade secrets, copyrights, trademarks, and patents that are legally protected from unauthorized use. It can take more than five years to officially register your IP so it is a must to protect it right away. There are a number of legal requirements to register your business’ IP and consulting an experienced IP attorney can guide you through that process.
- Identify potential liabilities. The type of startup business you own will come with a number of liabilities and risks. Liabilities can come in all forms of things that can go wrong. Businesses will potentially experience disgruntled employees and customers who seek legal action, unintended infringement on intellectual property, potential workplace dangers that can cause physical harm to others, among countless other risks that the business could be liable for. Identifying those liabilities and lining up your legal counsel, appropriate contractual agreements, insurances, and financial instruments, will help protect your new business from potential legal and financial harm.
- Solidify contracts. Once you’ve registered your startup business; applied for the appropriate tax IDs, permits, and licenses; and are ready to get started, you’ll want to have iron-tight, legal contracts in place for everything from an agreement on services to employment to vendor relationships. Solid contracts will eliminate any miscommunications and will stand up in court should there be a contract breach and legal action taken.
When initiating a startup business, it can be a daunting task as to where to even begin but by taking it step-by-step the business can get running in no time. Legal guidance from a startup lawyer can assist and expedite this process as well as ensure every registration, license, permit, and contract is executed accurately; intellectual property is protected; and taxes and securities are addressed correctly.
Complying with Securities Law
When you begin the process of funding a startup, if you are receiving funding from any other source but a personal loan or bank, you will mostly likely have to comply with securities laws. By issuing securities (stocks, stock options, convertible notes, etc.) to investors then you must comply with securities laws. Those securities must be registered with the Securities and Exchange Commission (SEC) unless exempt. Securities laws exist at the federal and state level to govern the sale of issuances of securities, which in turn protects investors because it requires companies to disclose information about the financial wellbeing of the company. Registering with the SEC takes time and can be expensive and therefore many private startup companies will file for an exemption. This process is complicated and burdensome and requires legal expertise to ensure compliance. Should a startup neglect or inadvertently not comply with securities laws it can have an adverse effect on the business. By not complying, startups can be subject to criminal or civil lawsuits, loss of investment due to legal risk, personal liability, company liability, and enactment of recession rights in which investors cancel investments or request money back.
Startup Law Services
There are a number of aspects to startup law and at Montague Law we can assist your business in the following areas:
- Angel financing
- Business structure (e.g., Sole Proprietorship, Partnership (Limited Partnership (LP) and Limited Liability Partnership (LLP), Limited Liability Company (LLC), Corporation (C Corporation, S Corporation, B Corporation, Close Corporation, Nonprofit Corporation), and Cooperative)
- Capital-raising strategy and management
- Commercial contracts
- Corporate governance
- Crypto and blockchain investment and funding
- Equity financing
- Fund formation
- Initial Public Offering (IPO)
- Joint Ventures
- Licensing agreements
- Mergers and Acquisitions (M&A)
- Mitigating risk
- Protecting intellectual property (IP) (e.g., trademarks, patents, copyrights, trade secrets)
- Seed financing
- Tax regulations
- Venture capital and financing
Glossary of Important Terms
Here are some important terms to learn when it comes to startup law:
Intellectual property (IP) is a business’ trade secrets, copyrights, trademarks, and patents that are legally protected from unauthorized use.
Securities are financial instruments used to raise funds for public and private businesses. Securities can come in the form of equity, debt (e.g., loans), and hybrids (equity and debt).
To find out how Montague Law can help you with your business startup needs, please call us at 904-234-5653 or fill in the form below.