The Upshot on Startups: What You Need to Know, Legally, When Launching Your Own Business

For millions of creative, hungry-for-more, idealistic individuals, nothing embodies the American Dream better than entrepreneurship. Being your own boss, owning your own business, nurturing it like a child, and watching it flourish speaks to a profound cultural need. It’s the commercial extension of the rugged individual in us all.

For startups, the last few years have witnessed a remarkable turnaround.[1] After reaching peak activity in the early 2000s and peaking again nearly a decade ago, US startup activity is approaching pre-recession levels.

While encouraging, the good news overlooks the fact that every year a large percentage of startups fail. Although hard data is difficult to come by, anecdotal evidence says that up to 95 percent[2] of startups will go bust. Self-reporting among company CEOs suggests that nearly half (42 percent) hit the skids because no one wanted what they sold.

But what about the other 58 percent that go belly up? Why do those startups fail? Often, it’s due to a failure to consider the many legal issues that arise when forming a new company.

Fits and “Starts” – Banking on Business Basics

One of the earliest steps overlooked is actual incorporation. Too often wide-eyed founders know all about creating a website and coming up with what they think is an original name (more on that later); though, they fail to incorporate as a business entity.

Incorporation, or forming a limited liability company (LLC), allows you, as the business owner, to protect your personal assets; it also enables you to take advantage of significant tax benefits. Best of all, it’s a pretty straightforward process… and it goes like this:

Contact your state’s Secretary of State office
Obtain the articles of incorporation
Pay the incorporation fees (usually a nominal amount)
File a Statement of Information form
Register your corporation with the IRS
Designate a registered agent if you live out of state

Next on the to-do list? Trademarks. Believe it or not, there’s a little more to trademarks than hitting “Option+2” on your Mac keyboard.

The first step is a question… Ask yourself and your newly formed team, “Is the name you’ve come up with used by another company in the same line of business as yours, to the best of your knowledge?” If the answer is ‘no,’ the next step is to crosscheck your answer with the US Patent and Trademark Office at www.uspto.gov and search the Trademark Electronic Search System database. The process can take as little as 90 minutes and costs $275-$325[3] to file the online form. Give Uncle Sam about six months, and voila – your new, shiny trademark certificate should be delivered!

Speaking of "Uncle" Sam, remember that whether you're starting a business with your Uncle Joey, your brother Rob, or your friend Susan, it's important not to forget that business means business. Now is not the time to let things slide or be casual about expectations. Moreover, it is imperative to determine the percentage of ownership, including shares allotment. Salaries (if any), hours committed, escape clauses, and grounds for removal must be detailed and signed by all parties. Too often, startup CEOs feel uncomfortable adopting such a litigious approach; a little conformity helps reduce the risk of future lawsuits.

Safeguarding the Secret Sauce

Once you’ve covered these basics, trudge a little deeper into the weeds and review what we’re going to call your “PCTSCA” checklist, or patents, copyrights, trade secrets, and confidentiality agreements (also known as a non-disclosure agreement). For clarity, here’s what these terms mean:

Patents – Prevent others from making, using, or selling the patented subject matter described in the patent’s claims.
Copyrights – Protect original art, advertising copy, books, articles, music, movies, software, etc.; it empowers the owner with exclusive rights to their own material.
Trade Secrets – Allows the owner the right to take legal action against anyone who breaches an agreement or uses unlawful means to obtain secret information.
Confidentiality Agreements – Allows the holder of confidential information to share it with a third party. But the third party must keep the information secret.

As one would expect, violation of any of these guidelines and laws can carry a significant legal cost. For instance, just sending preliminary threat letters, as in the case of copyright infringement[4], could cost thousands of dollars to retain legal services.

Venture capital funds raised $41.6 billion[5] in 2016, up from $19.6 billion in 2010, so 2017 is already shaping up to be a strong year for startups. What if all the money pumped into a promising new company were squandered in costly – and unnecessary – lawsuits? This scenario would be highly unnecessary because the proper foundational considerations can be addressed from the get-go.

To be sure, the American Dream will always need dreamers – confident entrepreneurs who believe that in business, anything is possible. But big picture beliefs must always be tempered by pragmatic precision.

Only the commercial law attorneys at Frankfort & Koltun can provide your business with the necessary know-how to ensure that your startup is on solid legal ground. Whether it’s contracts, intellectual property, copyright, product liability, employment, bankruptcy, or other legal business matters, our team of experts has you covered. Contact one of our partners, Robert Frankfort or Scott Koltun, for a free consultation by calling 631-242-7815.

References:

1. “The 2016 Kauffman Index of Startup Activity” from Kauffman Foundation, August 2016: http://www.kauffman.org/kauffman-index/reporting/~/media/079d9a863fcb4cc1a5ea4837ef252924.ashx

2. “90% Of Startups Fail: Here's What You Need To Know About The 10%” from Forbes.com on January 16, 2015: https://www.forbes.com/sites/neilpatel/2015/01/16/90-of-startups-will-fail-heres-what-you-need-to-know-about-the-10

3. “How to Register a Trademark for a Company Name” from The Wall Street Journal; retrieved on March 1, 2017: http://guides.wsj.com/small-business/starting-a-business/how-to-trademark-a-company-name

5. “How Much Does It Cost To Pursue A Copyright Infringement Claim?” from TraverseLegal.com on January 6, 2012: http://www.traverselegal.com/blog/how-much-does-it-cost-to-pursue-a-copyright-infringement-claim/

4. “8 things to understand about the current boom in U.S. venture capital” from Venture Beat on March 7, 2017: http://venturebeat.com/2017/03/07/8-things-to-know-about-the-explosive-growth-in-the-u-s-venture-capital-industry/