Start-ups and specialty businesses are businesses that bring novel ideas to the community. Since they are new, they are not typically addressed by the existing and well-established legal system. As such, many start-ups are in legal blind spots. Since the idea is new – so is the law. Risk is a huge factor, and proper legal analysis and opinion are a must. We are here to connect your new business idea with the existing legal world. Below are just a few elements that start-ups face:
- Initial Compliance and Determination. Before investing money and resources into a new idea, it is advisable to speak to an attorney to determine whether the business plan is lawful, viable, sustainable, etc. It is cheaper to pay an attorney now rather than paying one later to find out that all the money invested was for something that does not work.
- Selecting a Legal Entity. Part of the initial determination is the selection of a legal entity. As thoroughly described here, a legal entity is separate and distinct from its owner. It offers a liability shield for the owners and agents (those acting on behalf of the business). Determining which legal entity to use is very important to prevent converting from one entity into another.
- Starting as a Sole Proprietorship. A Sole proprietorship is a great start from some business owners. However, it does not provide the liability protection that a legal entity provides. When a certain threshold of revenue is achieved, a sole proprietor may be missing out on certain tax advantages. However, it is never a bad idea to start as a sole proprietor and later form a legal entity.
- Intellectual Property Issues. With new ideas, you must consult with an intellectual property attorney before you start your business so as to secure your interest in the idea before someone steals it.
- Non-Disclosure Agreements. Non-disclosure agreements (NDAs) are agreements signed by the parties that restrict disclosure of confidential information. If the business has proprietary and confidential information, without a property executed NDA, such information should not be shared. NDAs are very common in context of business development.
- Intellectual Property Assignment Agreements. In an employment context as well as for independent contractors, an intellectual property assignment agreement will assign any developed intellectual property to the business. This is important when employees or contractors continue developing an idea. These agreements automatically assign ownership to the business, rather than a contractor who claims it was their information.
- Employment Considerations. In California, since non-competes are non-enforceable, a business may choose to consider confidentiality agreements as well as intellectual property assignment agreements to restrict the use of confidential information by employees outside of work hours and after the employment relationship is over.
What can't I operate as a sole propietor since I can do everything I need with it and not hire a lawyer?
You can. Some businesses are not inherently risky (e.g. an eBay store with low sales, selling a $5 product). When a business grows, a separate legal entity is the only solution to providing protections to the owners and securing higher profits (tax considerations).
How do I know when I need to form a legal entity?
A legal entity needs to be formed right away if the operations are risky. If you are a sole proprietor, you may need to form a legal entity when you see that your business is growing and is profitable.
How does intellectual property work?
Intellectual property is the process of securing your rights behind an idea. It varies depending on the idea as well as its distribution. Regardless of whether the idea is new, an intellectual property attorney should be consulted. It is better to pay to secure your interest rather than regret a stolen idea.
Why are non-disclosure agreements needed?
If a business discloses confidential and proprietary information to another party and that information is not protected by intellectual property laws, it is “open season” on that information to be used by that party.
Can I just use a non-compete for my employees to protect my business ideas?
No. Non-competes are not enforceable in California. Regardless of what the employee signed, non-compete documents are void and are in violation of public policy. However, a business owner can bind employees with confidentiality agreements which allow an employee to start their own business if desired but prevents the employee from using your confidential information.