Chapter 14

Legal Considerations

  • Startup legal costs vary based on business type.

  • Online research platforms can help gather legal information.

  • Pro bono legal programs available through the U.S. Patent and Trademark Office to assist entrepreneurs.

Founders’ Agreement

  • Document outlining the understanding between co-founders on critical business issues.

  • May be non-legally binding but provides a framework for relationships and conflict resolution.

Types of Legal Structures

  • Crucial for notifying authorities, taxation, record maintenance, and decision-making processes.

Sole Proprietorship

  • Owned by one individual who is fully liable for business debts.

  • Owner has complete control and may keep all profits.

  • High personal risk exposure to liabilities.

General Partnership

  • Owned by two or more individuals sharing management responsibility and profits.

  • Income is subject to pass-through taxation, whereby taxes are paid at personal tax rates.

  • All partners bear personal liability for the business.

C Corporation

  • Distinct legal entity separate from owners, established via state government.

  • Can have unlimited shareholders; legally liable for its debts.

  • Shareholders' maximum financial risk equals their investment.

  • Advantages include perpetual existence and reduced shareholder double taxation on profits paid as compensation.

S Corporation

  • Limited to 100 shareholders.

  • Income and losses pass through to individual shareholders’ tax returns, useful for companies expecting short-term losses for tax benefits.

Limited Liability Company (LLC)

  • Combines advantages of partnerships and corporations.

  • Offers liability protection while allowing income reporting on personal tax returns.

  • Formation of ownership agreements is recommended.

Limited Partnership (LP) and Limited Liability Partnership (LLP)

  • LP: Pass-through entity with general partners managing the business but exposing them to liabilities.

  • LLP: Offers limited liability to its partners and is often used by professionals.

Benefit Corporation (B-Corp)

  • Certified by B Lab to meet standards of social and environmental performance.

  • Must declare social goals in its charter, offering protection against lawsuits.

Not-For-Profit Organizations

  • Entities performing socially desirable functions, exempt from income tax.

  • No shareholders; profits must be reinvested into the mission.

Legal Mistakes to Avoid

  • Relying on informal advice instead of consulting legal professionals.

  • Choosing an inappropriate business structure.

  • Experienced investors prefer C corporations; ensure formal agreements among co-founders from the beginning.

Intellectual Property (IP)

  • Includes intangible property like inventions, logos, and processes.

  • Protecting IP is vital for many startups; seeking legal advice from IP attorneys is crucial.

Types of Intellectual Property

  1. Copyright: Protection for original works of authorship.

  2. Trademark/Service Mark: Identifiers used to promote goods/services.

  3. Trade Secret: Confidential business information, such as formulas and customer lists.

  4. Patent: Exclusive rights granted for inventions.

Non-Disclosure Agreements (NDAs)

  • Protect IP by preventing unauthorized disclosure.

Global IP Theft

  • Digital content theft results in substantial losses, with U.S. damages estimated between $225-$600 billion annually.

  • IP rights vary by jurisdiction; protection in the U.S. does not guarantee it abroad.

Common IP Traps

  • Disclosure: Publicly revealing product details before patent filing can revoke patent rights.

  • Failing to Protect: Unique markers and licensing options can safeguard products against IP theft.

  • Origin Question: Innovations must be novel and useful for IP protection eligibility.

  • Ownership: Formal agreements on IP ownership are essential to determine rights among contributors.

  • Global Markets: Entrepreneurs must navigate international legalities to avoid pitfalls.

Hiring Employees

  • Employers must comply with federal and state labor laws.

Equal Employment Opportunity

  • Prohibitions against discrimination based on race, sex, religion, etc.

Employer Identification Number (EIN)

  • Required for hiring; essential for IRS documents and employee registration.

Unemployment and Workers' Compensation

  • Register and pay necessary taxes, including unemployment benefits and insurance.

Withholding Taxes

  • Employers must withhold payroll taxes and maintain records of employment taxes.

Employee Forms

  • W-4, I-9, and IRS Form 940 are critical for tax reporting and verification.

Benefits

  • Compliance with Social Security and health insurance laws is mandatory.

Safety Measures

  • Employers must ensure a safe working environment and provide for injured employees.

Payroll Management

  • Maintain accurate payroll records, timely tax returns, and effective communications with employees.

Hiring Contractors vs. Employees

  • Misclassification can lead to significant legal consequences; understand differences and regulations.

Compensating Employees

  • To attract talent on a budget, consider flexible hours and non-monetary benefits.

Objectives Journey: Vincent Kitirattragarn

  • Background: Grew up in a cooking-oriented family and studied biological engineering.

  • Business Journey: Transitioned to food entrepreneurship with Dang toasted coconut chips, leveraging trends and market opportunities.

  • Financial Milestones: Achieved high revenue and secured investments; established a brand in the snack market.

Critical Thinking Questions

  • Reflect on the key elements of a founders’ agreement in the context of co-founding a business.

  • Investigate IP considerations specific to the food industry.

  • Consider how to legally protect a personally meaningful food product if commercialized.