10 Legal Mistakes Businesses Make And How to Avoid Them

Mistakes Businesses Make

Legal mistakes can doom even the best startup ideas and founding teams. Why is this the case? When you start your business, there’s a lot to think about – accounting, marketing, and human resources.

With all these newfound responsibilities, it’s easy to forget the legal requirements. Don’t let this happen. Our post will discuss the 10 most common legal mistakes businesses make, and give you tips on how you can avoid them. 

Launching your business on a strong foundation when you’re first starting is essential. This is because as your business grows, so will your legal responsibilities. 

Let’s go through the 10 common mistakes businesses make below! 

Table of Contents

1. Not doing the right searches 

When you start a business, there are a number of searches you should do to make sure that you don’t run into any legal trouble later on. These searches aren’t just about what product you are intending to provide to the world, but more about the name and brand of your business. 

Some of the things you should check online are: 

Your business or company name 

If you’ve come up with a brilliant name for your business, one of the first things you should do is check that it hasn’t already been taken by another business. 

You can search for both registered business names and company names online. You’ll want to settle on a name that’s available before you start designing any logos or brand assets. Business names can also be trademarked, so you’ll want to also search your proposed business name on IP Australia’s online trademark search. Once you have your business name, it would be good to trademark your business name. You can register a trademark with Lawpath with ease. 

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Your logo and other brand assets

You can search images and other brand assets on the IP Australia website. 

Why would you consider doing this? Well, by doing this, you’ll find out if there are any business logos that use the same colouring or design as what you have in mind for your business. 

If you don’t check first, your trademark application will likely be rejected, or you may even get into legal trouble for infringing on a registered trademark. 

Using someone’s trade mark, patent, copyright, plant breeder’s right or design without their permission is known as IP infringement and can become costly for your business and lead to many legal issues.

Your domain name

Your business’s domain name will be an essential part of your business’s website’s online address, and it will allow visitors to search for the website. It functions as the identifying feature of the network address to show which particular domain it belongs to, such as lawpath.com, lawpath.net, or lawpath.org.au.

Starting a website for your business is one of the most important things you can do to get your business off the ground. Therefore you need to make sure you come up with a website name that your customers will recognise. 

Before you register your domain name, it is important you review which domains you are eligible for and whether they are available. For example, in Australia, an Australian Business Number (ABN) is required for all .au domains.

Next, find a registrar for your domain. Particular domain names such as .au require an accredited registrar. Conduct a search to find out whether your domain name has already been taken. 

One legal consideration to remember is that domain names are not permanent, and the license only lasts for a specified period. If you wish to use the domain name or website brand identity forever, we recommend you consider applying for a trademark.

2. Not protecting your information

As a small business owner, there’s no doubt that you have an innovative solution to a problem or you have recognised a gap in the market that others haven’t noticed. 

At this early stage of your business, it makes sense that you want to keep your business idea a trade secret. However, there will be a point in your business plan where you will need to share your share in order to raise capital. This is where a Non-Disclosure Agreement, also known as an NDA, can be useful. 

A Non-Disclosure Agreement (NDA) is a legal document that will safeguard your confidential information. There are, in fact, many instances where you will maybe relaying sensitive information about your business to another party, and it’s wise to protect it. There are two types of NDAs. They include

  • One-way NDA – One-way means that the receiver of the information must keep the information confidential. 
  • Mutual NDA – A mutual NDA means that the discloser and the receiver must both keep the information confidential. 

Some examples of when you’ll want to use an NDA are:

When you’re looking for investors

If you’re talking to people about your idea and are hoping to secure investment in your business, an NDA can help ensure that the information you provide to these people is secure. 

However, if you’re talking to venture capitalists, using an NDA is not common practice. This is because venture capitalists look for ideas and businesses they can invest in and will likely refuse to sign such a document.

When you’re talking to potential co-founders

Co-founders are important to brand-new businesses. Starting your business with a co-founder means you won’t be launching your brilliant idea on your own. 

However, it’s important that co-founders are on the same page when it comes to how the business is founded but also the general vision for the business. 

Before you start negotiations, ask them to sign the co-founders’ agreement. Using an NDA will keep your information safe in the event that your co-founder leaves the business.

If you’re hiring employees

When it comes time to start hiring for your business, you’ll want to make sure that any information your hires are exposed to is protected.

If you have employment contracts in place, your business will also be protected under the confidentiality clause.

3. Not using a Co-Founders Agreement

If you’re starting your business with a co-founder rather than starting your business as a sole proprietor, having a co-founders agreement is one of the most important documents you should be entering into.

Using an NDA when talking to potential co-founders is one thing, but once you’re ready to formalise your partnership, you should have a co-founders agreement in place.

Essentially, a Co-founder Agreement is a contract between all the co-founders setting out the ownership, initial investments and responsibilities of each co-founder. The importance of having a co-founder agreement is because it covers the following details:

  • Co-Founder details;
  • Project description;
  • Equity breakdown and initial capital contributions;
  • Roles and responsibilities of each Co-Founder;
  • Management and approval rights;
  • Non-compete, confidentiality and intellectual property; and
  • Resignation, dissolution and removal of directors

If you’re still not convinced about the importance of having a co-founder agreement in place, read the example below: 

Ronald Wayne was the third co-founder of Apple. He bought 10% of Apple in the 1970s for $800. Two weeks later, Ronald sold his stake for $800 because he wasn’t happy with how the company was going. These days, that 10% stake would be worth $95 billion.

 This example demonstrates what can happen when co-founders aren’t on the same page and don’t have a shared vision for the business. Later on, when the company is registered, you can also distribute ownership in the company by using a shareholders agreement.

4. Copying and pasting your online terms from another website

You’ll probably notice that a lot of websites have the same documents or terms on their website. 

These include privacy policies and terms of use. What do these terms mean? 

Privacy policy

It’s inevitable that your website will be collecting information about your site’s visitors. Consumers take their privacy very seriously, and it’s important that businesses reflect this. 

This can be done by employing a privacy policy. A privacy policy is a document that covers how your business deals with personal information data. Depending on your business needs, there are various privacy policies that you might use. A privacy policy will cover:

  • how personal information data and sensitive information is collected;
  • what the personal information is used for;
  • how the personal information data is stored and managed; and
  • the kind of control and rights that customers have over their personal information.

Website terms and conditions of use

This Website Terms and Conditions of Use allows you to state your business service standards and is especially beneficial for an online store or businesses selling goods and services through a website. 

Given the popularity of eCommerce and online businesses, the Australian Consumer Law also mandates that Website Terms and Conditions be easily accessible to your customers on your website.

The importance of having website terms and conditions of use is that it covers: 

  • Australian consumer law and consumer guarantees;
  • Delivery of goods, returns and refunds policy;
  • Privacy and a disclaimer for warranties;
  • Disclosure of information;
  • Your ownership and intellectual property;
  • Limiting liability for information and material;
  • Limiting liability for third party links; and
  • The user’s rights and a licence to use the website.

It may be tempting to find a business that’s similar to yours and copy and paste their terms over, but this is ill-advised. This is because your business idea is unique, and therefore your terms and conditions will need to be unique as well.

Example

You’ve placed terms and conditions on your site by copying and pasting another company’s Ts and Cs. You forgot to change the names in some parts of the document (which were hidden in the fine print). The business you lifted it from is now suing you for copyright infringement.

5. Failing to protect your intellectual property

When you’re starting a brand-new business, often your idea or your processes are the only things you have of value. Your idea is the most valuable asset your business has at this point which is why it should be protected. 

Importance of protecting your intellectual property 

One of the more common mistakes in startups is a failure to protect intellectual property rights. Intellectual property (IP) describes any kind of intangible assets such as an invention, a brand, a design, or a process. A common instance where businesses can run into trouble is where a website, graphic or other content has been developed by someone externally. 

The issue with this is that a business may fail to make sure that they actually own this asset. This is why when outsourcing creative jobs for your business, you should either have a term in the services agreement which confirms your business owns the intellectual property or have the assets assigned to your business by using an intellectual property assignment agreement.

Other reasons why it’s important to protect your intellectual property is to avoid two key issues that may arise.

1. The moonlighting problem

A common problem can be if you’re looking to start a new business whilst still working for another employer. This is because a lot of employees will have a clause in their contract that automatically gives the ownership of any intellectual property they create to the employer. 

To alleviate this, you should check that there’s an assignment of intellectual property clause in your contract, that you’re not working on your idea during office hours and that any work you do for your new venture isn’t done on your employer’s property (i.e. your work computer). 

2. The Zuckerberg problem

Facebook is one of the most popular social media websites in the world, however, the original idea for a social networking site apparently came from someone other than Mark Zuckerberg. 

He allegedly stole the idea after being hired to program a similar site called ‘ConnectU’. When Facebook launched a few short months later, the founders of ConnectU sued Zuckerberg. 

However, all the founders of ConnectU had to rely on was a couple of emails and the oral contract made between them. 

This is actually a surprisingly common problem, which further illustrates why it’s so important to have the right legal documents in place, such as a website development agreement or contractor agreement. 

How to protect your business’s intellectual property

Each business will protect its intellectual property that best suits its requirements, but the most common types of intellectual property mechanisms that you can have in place include: 

Copyright 

Copyright is a type of intellectual property (IP) right that protects the original expression of ideas or subject matters in a material form. Copyright does not need to be registered; however, for works to be protected, it must originate with the author and can’t be copied from anyone else. 

Trademark

A trademark is an element, or combination of elements, that make up your business’s brand. Furthermore, it is a unique way to set your brand aside from your competitors. There are two requirements to qualify for trademark protection. They are:

  • 1. Your mark needs to be unique and distinctive 
  • 2. Your mark cannot be identical or similar to an earlier trademark 

Patent

A patent provides you with an exclusive right over any device, substance, method, or process that is new and inventive. To satisfy a patent registration, the following requirements must be evident:

  • The intervention must be a patentable subject matter
  • The invention must be new
  • The invention possesses an innovative step
  • The invention is capable of industrial application
  • You have not yet publicly disclosed the invention before you apply for a patent

In Australia, you can apply for a patent by filing the relevant application with IP Australia. The application must provide clear and complete disclosure of your invention, including specific drawings and descriptions.

Designs

A design registration protects the visual appearance of a product. 

This is in contrast to a patent that protects the functionality of a product. However, similar to patents, a design must:

  • Be new and inventive
  • Not have been disclosed publicly

If you meet the eligibility requirements, you can apply for a design registration with IP Australia.

6. Incorporating at the wrong time

It’s vital that you incorporate your business at the right time. It’s unwise to register your company too early, but also detrimental if you do this too late in the piece. 

This is especially the case where you’re entering into contracts and taking on risks, as you need to make sure these fall to the company and not you individually. Once you start taking on risks and entering into contracts, it’s usually time to incorporate your business

There are also many benefits when you register as a company which include:

Tax

If you run your business as a sole trader or a partnership, you will be taxed as part of your personal income. Companies pay a flat corporate tax rate of 30%. As your business becomes more profitable, being taxed at an individual rate will become excessively expensive.

Investment

Investors normally don’t invest in a sole trader or partnership. The reason for this is that they want to invest in a company. A company is made up of shares, and it can very easily purchase a percentage of those shares.

Disputes

Often disputes in a company are governed by what is called a shareholder’s agreement, and there are very stringent rules set which set out how disputes should be handled. If the business is involved in any other disputes, the company will be liable and party to the proceedings. If the business is a sole trader or partnership, you will be personally involved in the proceedings.

7. Not vesting

Imagine you have two founders who start a business. They each get 50% of the business. However, after six months, one decides to leave and wants nothing to do with the business anymore. What happens? 

The problem is that that person just walks away with 50% of the business, and the other person is stuck doing 100% of the work. So what are the solutions? Vesting can prevent this. If you are starting a new business, it’s crucial that you have vesting in place.

Vesting means that co-founders will earn their merit or their shares over a certain period of time. For example, none of you earns any equity in the first year. After the first year, you get 25%. In this case, if you are splitting the business 50/50, it would be 25% of your 50%. Over time, this equity vests and your share will increase.

8. Not having an advisory board

It’s important to have people around that can guide you, which is where an advisory board can assist you. Having an advisory board means you can surround yourself with people that have done it before or have experience in the industry. 

Your advisor may sit in on some high-level, strategic decisions. It’s fantastic for you to bounce ideas off of them. It’s also great for networking and can lead to you being introduced to your first investor.

9. Not using the right employment agreements

It’s important to have the right documents when it comes to hiring employees. The right document is important because:

  • Employment law requirements — These employment documents are made up of government and legally mandated elements 
  • Correct written agreements are required by company policy and practice 
  • Documents are suggested by human resources practices 
  • Formal and informal record keeping about employees 

You may be hiring an independent contractor and not know which document to use, or you may think using a permanent employment contract is suitable. It’s important to clearly set out the employment type and terms to avoid confusion and potential legal disputes.

Using the right documents and ensuring proper documentation means that you’re protecting your business compliance requirements but also potentially avoiding a lawsuit if you get an employee mixed up. 

10. Using the wrong lawyer

The law is a huge area, and it’s really important to engage a lawyer that has expertise in your specific area if you need to undertake legal action.

There’s no point in hiring a criminal lawyer from a law firm to issue equity under an employee share scheme or shareholder’s agreement, as they won’t be able to provide you with the right legal advice. This is because the lawyer won’t have sufficient expertise and won’t know what they’re doing. Hiring the right lawyer will save you a lot of money in the long run, and you can find one easily online.

The early stages of your business will set the tone for how the rest of your business’s journey will go. Knowing how to start your business on the best foot possible will help you set your business up for success in the future.

Conclusion

Founders and startups alike can suffer legal problems even if they have great ideas. Staying on top of your legal is challenging – with so many other elements in your business that need attention, it’s easy to forget about the legal gaps requirements. 

The good news? We’ve outlined the common mistakes businesses make and how to avoid them. Here is a summary of the common mistakes to be aware of:

We’ve outlined the most common legal gaps businesses face and eight awesome tips for staying legally compliant. Here is a summary of the top tips:

  1. Not doing the right searches
  2. Not protecting your information
  3. Not using a co-founders agreement
  4. Copying and pasting your online terms from another website
  5. Failing to protect your intellectual property
  6. Incorporating at the wrong time
  7. Not investing
  8. Not having an advisory board
  9. Not using the right employment documents 
  10. Using the wrong lawyer 

We hope the tips will post will guide you. However, if you don’t know where to start or how to best identify the legal gaps in your business, try our Legal Health Check. The Legal Health Check will provide you with a genuine assessment of your business’s legal gaps.

Legal Health Check for Small Business

Uncover your small business’ legal gaps in minutes with this award-winning tool.

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