Top 21 startup mistakes to avoid: #7: No proper legal structure for the business or neglect of legal protection

Top 21 startup mistakes to avoid

“The biggest mistakes that startups make are not registering their businesses, picking the right business entity or protecting their intellectual property. These three areas are crucial to a business starting right, where if not done properly, will cost valuable time and money to correct.” ~ Heather Green Miller, Attorney and Owner, HGM Law Office

Do not neglect legal protection

Yes! Legal protection is particularly important in business. You must understand the nature of business you are in and the legal implications of the things you do. Remember that in the court of law, ignorance is no excuse. Failure to address these beginning steps can come back to bite you years down the line.

File for the proper legal structure and business registration

This is one of the areas startups pay the least attention to. They only become aware of the implications when issues crop up later in the business. It is important that startups understand the five different kinds of legal structures that exist in business. The structure of a business is essential for its success in the short and long terms. Below are the most common legal business structures:

  1. A Sole Proprietorship is the most basic; and easiest – type of business to establish. There is no distinction between the business and you, the owner. You are entitled to all profits and are responsible for all your business’s debts, losses, and liabilities.
  2. A Partnership is a single business where two or more people share ownership. Each partner contributes to all aspects of the business, including money, property, labor or skill. In return, each partner shares in the profits and losses of the business.
  3. A Corporation (sometimes referred to as a C Corporation) is an independent legal entity owned by shareholders. This means that the corporation itself – not the shareholders who own it – is held legally liable for the actions and debts the business incurs.
  4. A Limited Liability Company (LLC) is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.
  5. A Cooperative is a business or organization owned by and operated for the benefit of those using its services. They are common in healthcare, retail, agriculture, art and restaurant industries. Profits and earnings generated by the cooperative are distributed among the members, also known as user-owners.

Many startups neglect legal protection for their enterprises until they get into trouble which accounts for the reason why some fail. It is time to develop a legal structure for that promising business

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