Legal Land Mines in Starting a Business

Jonathan K. Hustis

With a challenging economy resulting in high unemployment and corporate consolidation, many business leaders consider now the perfect time to launch a new venture.

DBJ: What are some of the most important legal issues entrepreneurs need to tackle when starting a business?

Determining who owns the business is important when more than one person is involved in the startup. Business ownership issues arise when there is no structured discussion and documentation of ownership interests. One person may contribute cash, while another brings in a revenue-producing consulting project. Others may contribute labor, expertise, new ideas, industry contacts, etc. What are these things worth? What do these people get in return? Disagreements even occur about whether someone has any ownership at all. The solution is to sit down and document a legal ownership structure. This helps entrepreneurs focus on business success when they need to, and avoids unnecessary squabbling.

Who owns assets used in the business also raises issues. Independent contractors may perform development and creative services, providing critically important intellectual property to the business. Without appropriate written agreements, ownership of these works remains with the independent contractor, not with the business. This can be catastrophic when investigation by a potential investor, strategic alliance or merger partner uncovers defects in ownership. Avoid this problem by using standard and customized written agreements with contractors to place ownership of intellectual property with the hiring business.

“Who has what authority?” is also an important issue. The authority to hire and fire, to buy and sell, to borrow and lend — all of these should be discussed early and can be established legally in business formation documents such as bylaws, ownership agreements and employment contracts.

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