Building a startup from the ground up can be much more difficult than many aspiring entrepreneurs imagine. Beyond developing a mission, securing funding and hiring employees, getting the legal structure of the business in order is often overlooked and underdiscussed.
Below, 20 Forbes Business Council members discuss common legal mistakes startups often make, as well as what leaders should do to remedy them.
1. Prioritizing Ideas Over A Proper Business Structure
Many startups mess up by not setting up a proper business structure early on. It’s easy to get caught up in your big idea and put off the “boring” legal stuff, but don’t make this mistake. Pick the right entity (LLC, corporation, etc.), keep personal money separate from business funds, and stay on top of the paperwork. Your future self will thank you when investors come knocking or you face your first legal challenge. – Albert Golukhov, ExcessLogic
2. Approaching Legal Structure In A Disjointed Way
One of the foundational mistakes that startups make is to rely on law, tax and financial experts in a disjointed manner, which causes many gaps and holes in the overall legal structure itself. This mistake of not tackling law, tax and financial decisions in a unified manner results in the corporate veil being pierced, personal assets being liquidated, and even bankruptcies and liquidations. – Sidhartha Peddinti, Law and Tax Consulting
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3. Making Short-Term Plans And Processes
One of the most common mistakes startups make is not planning for the long term by setting up processes, tools, systems and relationships that will endure, grow and change. Changing systems, tools and processes as a company grows and changes is expensive and time-consuming. The right relationships make everything better and easier from the start. – Tina Wallis, Law Offices of Tina Wallis, Inc.
4. Selecting The Wrong Business Structure
One common legal mistake startups make is choosing the wrong business structure. For example, I initially formed an LLC but later realized a C-corp was necessary for raising capital and scaling. Avoid this by consulting a startup attorney early on to align your entity type with your long-term goals. It’ll save on time, money and legal headaches down the road. – Paige Williams, AudPop
5. Failing To Secure And Integrate IP Protections
One of the simplest and most common legal mistakes startups often make is not securing and integrating some of the most basic intellectual property protections into the rollout plan. IP, such as corporate logos, trademarks, websites and more, will communicate a powerful and consistent message when done in tandem. Remember that securing a website doesn’t mean the trademark is available, and vice versa. – Chris Gerlach, Synergy Life Science
6. Acting Without Knowing Industry Rules
One of the biggest mistakes I see is startup leaders jumping in without really knowing the rules of their industry. In franchising, that could mean skipping steps like properly preparing your franchise disclosure document. It’s tempting to move fast, but taking time to get it done right with the right experts will save you a ton of pain down the road. – Aaron Harper, Rolling Suds
7. Neglecting To Formalize Founder Agreements
One common legal mistake startups make is neglecting to formalize founder agreements early on. When roles, equity and decision-making power aren’t clearly defined, it can lead to costly disputes down the line. To avoid this, founders should create a written agreement from day one. Clarity at the start protects relationships and the business as it grows. – Chad Angle, Reputation Defender
8. Lacking A Plan For Potential Marriage Breakdowns
Many startups fail to plan for divorce. I’m not talking about divorce in the metaphorical sense, as in the founders deciding to go separate ways or remove another founder (which is also important), but literal divorce. Oftentimes, founders have partners, and that has legal consequences. Planning for these events up front can save you down the road. – Brandon Carlson, Lean TECHniques, Inc.
9. Relying On A Single Legal Firm
Don’t expect one firm to handle every niche issue. We solved this by appointing an external law firm to act as our lead advisor, serving as a “hub” that manages routine work and introduces us to specialist “spokes.” Leaning on our general counsel to vet the right experts has saved us hours of sourcing firms, while also reducing redundant research fees. – Miriam Chickering, NextGenU
10. Neglecting To Hire Experienced HR Experts
The biggest mistake is believing you don’t need an experienced human resources expert. Many startups are laid low because founders believe they alone can do it all, including making legally compliant hiring or firing decisions. Founders can be so sure of their infallibility that they easily break wage and hour laws, ignore sexist or racist bullying, and retaliate against people for complaining. – Harry Kazakian, USA EXPRESS LEGAL & INVESTIGATIVE SERVICES
11. Failing To Establish A Solid Legal Foundation
One of the most common legal mistakes that startups often make is neglecting to establish a solid legal foundation, particularly in terms of compliance with regulations and intellectual property protection. This oversight can lead to significant issues down the line, including lawsuits, loss of business opportunities and financial penalties. – Veena Jetti, Vive Funds
12. Cutting Corners On Legal Advice
Startups are often short on cash, so many founders look to cut costs. One of the biggest mistakes is cutting corners on legal advice. Hiring a lawyer might seem expensive, but not hiring one can cost more in the long term. A poorly worded contract, unclear IP or vague agreements may not seem urgent now, but I’ve seen founders lose equity, delay funding or get locked into bad deals. Invest in proper advice. – Nuala Walsh, MindEquity
13. Failing To Get Contracts In Writing
Nail down everything in writing with solid contracts through a lawyer or an online service to avoid future disputes. Protect your brand names and logos with trademarks and your innovations with patents. An IP lawyer can prevent theft of your edge. Don’t risk your personal assets by staying solo; choose an LLC or C-corp early for legal and financial safety. – Daniel Levy, GovernmentOfficeFurniture.com
14. Drafting Contracts Without An Attorney
I’ve seen many software startups try to draft licensing agreements on their own or copy one from the internet, rather than retaining an attorney to prepare this critical agreement. Startups have very limited resources, but using an attorney to help them protect their IP and their rights in a licensing deal should always be a major priority. – Karen Cashion, Tech Alpharetta
15. Failing To Thoroughly Study Legal Business Specifics
Startups often make the mistake of not thoroughly studying the legal specifics of their business. Some entrepreneurs ignore legal aspects, thinking they can address issues as they arise without planning ahead. To avoid this mistake, it’s important to consult with a lawyer from the start and develop a strategy that considers all potential legal risks. – Jekaterina Beljankova, WALLACE s.r.o
16. Ignoring Official Contracts
One of the biggest legal mistakes startups make is ignoring official contracts with partners, employees and contractors. To avoid problems, always sign contracts, especially anything regarding intellectual property and ownership divisions. Consult a lawyer early on to properly handle all legal aspects. – Daniil Demchuk, Smart Flats 24
17. Failing To Update Operating Agreements
In my experience working with startups, a mistake I often see is leaders failing to update operating agreements as the business evolves. Early documents can quickly become outdated. I recommend revisiting and adjusting them with each major milestone to avoid gaps that can cause problems later. – Andrew Lopez, 1000 Media
18. Forgetting To Show Up For Team Members
Don’t get greedy and forget the people who helped build what you have. If your team shows up for you, show up for them. Fair pay, respect and integrity aren’t optional. If you cut corners, not only will you lose trust, but you might find yourself facing legal consequences, too. There are plenty of attorneys out there ready to take on a case when the wrongdoing is obvious and expensive. – Kelly Rocklein, UGC Pro
19. Handing Out Equity Too Early
Startups get into trouble when they hand out equity too early without proper vesting or performance terms. I’ve seen situations where someone no longer has ties to the company but still clogs up the cap table. Set strict vesting and written agreements from day one so ownership stays aligned. Investors read messy cap tables as poor judgment, so that can become a serious barrier to raising money. – Zain Jaffer, Zain Ventures
20. Assuming Good Vibes Will Protect You
Don’t confuse friendship with foundation. The biggest legal mistake startups make is thinking good vibes will protect you. They don’t. Document everything, including equity, roles, decision making and IP, before emotions tangle with expectations. A handshake may start the dream, but only a contract keeps it alive when storms hit. – Arpit Jain, SEO Sets
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