Between developing a business plan, formulating a budget, creating a brand and ordering the first round of promotional items, it is easy for entrepreneurs and start-up enterprises to overlook the legal implications of starting a new business. While perhaps perceived by many as something between a luxury and a necessary evil, undertaking the appropriate steps to ensure that the business’s owners and assets are adequately protected should be a top priority for any emerging enterprise. This article outlines some of the basic legal issues implicated in starting a new business.
Selecting Business Partners and Choosing a Form of Entity
Sure, you and your college dorm mate spent literally thousands of hours co-developing your innovative product before you graduated, you have common interests in seeing the product succeed in the marketplace, and you trust each other completely. All of that means nothing. After the first million comes in and you want to sell but your partner claims he owns everything and tries to push you out while unveiling the secret partner he has been sharing information with for the past six months, your once and future friendship will get you nowhere. Even in the most amicable of circumstances, is almost always worthwhile establish a formal legal relationship and clarify the parties’ respective rights and obligations in writing before the enterprise gets off of the ground.
Forming a legal entity to operate and own the assets of the enterprise has numerous benefits. Generally speaking, a corporation or limited liability company affords more benefits than a general partnership in terms of limiting the liability of the individual owners of the business. In addition, carefully-drafted operating agreements and bylaws, coupled with buy-sell agreements, non-competition agreements and other contracts, can help ensure that the business’s interests are adequately insulated in the event of any issues that may arise from member disputes or conflicts of interest. All of these documents need to be prepared in connection with open discussions and negotiations concerning the core legal and financial implications of the business. Intellectual property licensing and assignment agreements may also be necessary, depending on the circumstances surrounding the development of the product and associated brand.
Protecting Trademarks, Copyrights and Web Domains
The appropriate intellectual property protection strategy for any individual enterprise will depend on its business strategy, organizational structure, industry, competition and other factors. Generally speaking, new trademarks need be cleared and protected very early in the process and on an ongoing basis. Copyrighted materials, particularly for software companies and businesses in advertising and other creative industries, also need to be adequately protected on a timely basis. Beyond clearance and registration, a basic intellectual property strategy should include maintaining a comprehensive and integrated intellectual property portfolio of all of the company’s information assets.
Related, emerging enterprises should consider developing a domain name strategy that is tied to their broader intellectual property strategy. Even for brick-and-mortar businesses, it is crucial to protect the company’s online presence and identity through acquisition of domain names and policing of online content. The recent global release of the “.co” TLD adds an additional component to this process.
Respecting Third Parties’ Intellectual Property Rights
In connection with developing their own identity, products and services, businesses also need to take proactive measures to make sure that they are not infringing on the intellectual property rights of existing third parties. Such third parties include not only competitors, but also web designers, advertising agencies, music labels and other producers of creative content. The trademark clearance and selection process should involve a rigorous examination of brands already on the market, and the product, advertising and website development processes should all be undertaken with an eye toward avoiding unauthorized use of third-party media. Where third-party rights stand in the way of a development project, business owners and entrepreneurs should consider either licensing or acquiring the relevant intellectual property. The upfront costs of this approach will likely significantly outweigh the risks and potential litigation costs associated with infringing on third parties’ rights.
Advertising and Using Social Media
Once the trademarks have been cleared, the product is fine-tuned and the business development strategy is in place, the business owners next need to ensure that the company’s advertising materials comply with applicable law. Generally speaking, advertising must not be misleading, must not infringe on third parties’ intellectual property rights, and must comply with all relevant and industry-specific rules and regulations. Using social media as a marketing tool also has some unique legal implications. For example, the Federal Trade Commission recently issued revised guidelines for the use of endorsements and testimonials which have direct application to blogs, Twitter feeds and Facebook fan pages. Laws regulating promotions and contests may also be relevant to a social media advertising campaign. In addition, a bill introduced in Congress in July would create a private right of action for privacy violations related to the online collection and sharing of personal information.
The foregoing constitutes a brief overview of some of the legal issues that should be considered when developing a new business enterprise. A business may face a whole host of other legal issues as it grows and expands, from issues relating to the hiring and firing of employees to those relating to seeking capital from outside investors. With a proactive approach to risk management and legal compliance, entrepreneurs and owners of emerging enterprises can help ensure that their assets will be protected.
Jeffrey Fabian is the owner of Fabian, LLC, a solo law firm located in Baltimore, Maryland that assists entrepreneurs and emerging businesses in all aspects of their transactional legal needs.