How To Set The Legal Framework For Your New Business

Founding a new business should be done within the framework of the law. As Corporate Finance Institute informs us, small businesses already face several legal concerns in their operation. The legal framework behind a company should rank high on its list of priorities. Many business owners don’t look at the nitty-gritty of setting up a business but prefer a “big picture” view of things. Unfortunately, a business’s formation’s legal concerns don’t fall into the “big picture.” Violating legal guidelines can have severe repercussions for a business. From personal injury lawsuits to mass tort cases, enterprises will enter a minefield of potential litigation if they aren’t prepared. Here, we cover the basics of how a company can develop its legal framework to avoid running into these problematic situations later on.

Mark Out Your Intellectual Property

Your intellectual property rights as a business cover many elements – from the company’s logo to any designs and prints the business makes count towards the enterprise’s IP. Setting up the framework for the company’s IP is crucial early in its development. Most companies have agreements in place so that the company’s core operating ideas and anything produced for the business by an employee remains the business’s IP. This step ensures that if an employee were to leave the enterprise to set up a firm that may compete with it, they can’t use anything the company currently uses to do so.

Intellectual property rights usually fall under a particular office in a business, depending on how the firm is structured. For companies with an R&D department, the CTO or CEO usually controls the company’s IP registration. However, IP extends to more than just designs and process descriptions. In the digital age, every type of information can now be considered intellectual property, from materials in the cloud to financial details about the company’s operation. Protecting this data can be part of the business’s overall IP strategy. Trademarks can be inexpensive, coming up to a few hundred dollars per filing, but patents may be more expensive. For early-stage businesses, this cost might be too much to consider, but if producing new hardware is the business’s concern, registering patents may be worth the extra investment.

Develop a Concrete Equity Agreement

Once you have many individuals involved in a business, there will be concerns about how the equity is divided. Founders typically begin their relationships with solid backgrounds. Those selling DIY merchandise or full coverage painting & flooring, for example, usually have spent some time working in the trade. They might have grown up together or worked for the same company over an extended period. However, as with all other relationships, they may evolve with time. Occasionally, these relationships turn sour, and the result is either one founder leaving the business or trying to force the other one to go. Legally stating where the boundaries of ownership lie and what is expected from each founder helps establish a precedent if things turn sour with founders later on.

Co-founder agreements deal with equity. There are no hard-and-fast rules that lawyers use to determine who should get what equity. Usually, it’s decided through the contribution that each co-founder brings to the table. The company accountant can overview its assets and holdings to determine the equity entitled to each co-founder. Additionally, many of these co-founder agreements have a non-compete clause that prevents any of the parties involved from using the information they know about the business to start their own competitor or work for a rival. Many companies fail to include a clause that ensures the IP of a founder stays with the business, even if that founder leaves. This clause keeps the business’s core knowledge secure within the company, regardless of the co-founders’ relationship.

Grow Within Legal Boundaries

Small businesses may not always be looking at the future, but scaling is a concern that should be addressed early on. A company that doesn’t consider scaling may run into legal issues down the road. If you’re a startup that intends to offer goods and services internationally, you may need to register a business entity within those international locales. Alternatively, you could partner with a local company as a distributor. Both of these have their own legal requirements that a business may need to observe. Registering a local business may require understanding local tax law. Partnering with a local distributor may have different taxation levels to consider. Companies who intend to go either route would benefit from discussing their decisions with an attorney.

Setting a Precedent

When you register a business, you take on specific legal responsibilities. Ensuring that the company’s legal framework is sorted out can help the business in the long run. Not having a framework risks having your business stall right out of the blocks. By dealing with these issues from the start, you can arrange for a more streamlined growth and development of the company over time.

Brett Sartorial

Brett is a business journalist with a focus on corporate strategy and leadership. With over 15 years of experience covering the corporate world, Brett has a reputation for being a knowledgeable, analytical and insightful journalist. He has a deep understanding of the business strategies and leadership principles that drive the world's most successful companies, and is able to explain them in a clear and compelling way. Throughout his career, Brett has interviewed some of the most influential business leaders and has covered major business events such as the World Economic Forum and the Davos. He is also a regular contributor to leading business publications and has won several awards for his work.