Tag Archives: Legal

7 Common Tax Mistakes Made by Startup Businesses

7 Common Tax Mistakes Made by Startup Businesses

A common misconception among many entrepreneurs is that their startup will not face any tax filing requirements while in the early stages of the business.

However, this is not the case.

If you incorporate your business or form an LLC you have tax and other government filings that are due, even if you had little to no financial activity.

As a result, it is important to understand the tax laws associated with your startup’s legal entity as they may differ depending on whether you are a sole proprietor, a partnership, or some form of corporation.

There is no “right” type of entity that can be applied to all startups. Rather, there is the type of entity that is right for you and your startup.

Below are a few common startup tax related mistakes that can save you time and money in the long run:

1.Proper Record Keeping

It is important for a business, no matter how big or small, to have its own set of books. If the startup team lacks a solid bookkeeper or someone with financial expertise it can be very inexpensive to hire a bookkeeper on a part-time basis. You can also hire a consultant or accountant to help you setup a system that you can maintain going forward.

2.Quarterly Taxes

While you are exempt from paying quarterly taxes in your first year it is still a good habit to get into. First and foremost, you don’t want to get sticker shock when it comes time to pay taxes and you haven’t been setting aside cash every quarter. Secondly, you are going to have to start getting in the habit of paying quarterly taxes sooner or later so you might as well start now.

Additionally, set up separate accounts for anticipated taxes like self-employment and employee withholding. The biggest problem for many business owners when it comes to tax season is having enough cash on hand to pay for taxes.

3.Record Your Startup Costs

Almost every cost you incur when starting your business is eligible for a tax deduction – think market research, travel, customer surveys, prototypes, advertising, branding, etc. All startup costs up to $5,000 are deductible in full in the first year. Furthermore, if your costs go over $5,000, you
can potentially roll out the deduction for up to 15 years.

4.Track Expenses Correctly

While many of your startup costs are deductible be sure that you are recording these expenses correctly to ensure protection if audited. For travel and entertainment expenses over $75 you need to maintain receipts and a recorded reason for the expense. When using your personal credit card be sure to write an expense report to the business shortly after incurring the expense. Track your miles if you plan to deduct car travel to and from your office.

5.Know How To Classify Employees

Many startups think they can avoid paying payroll taxes by classifying their employees as independent contractors. However, the IRS is cracking down on this misclassification and this is one penny that is not worth pinching.

There are a lot of nuances surrounding the differences between an employee and an independent contractor. The biggest factor has to do with how you control this person’s time. If you are telling them when and how to work they are most likely an employee.

6.Blending Business and Personal Finance

Many entrepreneurs make the mistake of neglecting to claim certain expenses as business expenses, such as a home office. On the other hand, many entrepreneurs fail to separate their personal finances from their business finances and often get sued or are forced to pay additional taxes. Be sure to maintain a clear line between your business and personal finances.

7.The Difference Between Equipment and Supplies

Typically, equipment expenses are amortized over the lifetime of that piece of equipment and therefore face unique deduction eligibility requirements. Supplies on the other hand, such as pens, notepads, and printer ink, have a lifetime value that expires far more quickly. In order to get the most out of your deductions be sure to track your expenses accordingly.

If you have a question about your Startup or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Avoidable Legal Dilemmas Every Entrepreneur Should Know

Avoidable Legal Dilemmas Every Entrepreneur Should Know

Although the verdict is still out whether or not entrepreneurship can be taught there are a few legal problems that all entrepreneurs can avoid with some proper foresight.

8 Startup Situations Every Entrepreneur Wants to Consider

1) Founder’s Agreement: Most co-founders will have some simple planning conversations at the beginning of the venture. However, it is important to take these conversations one step further by developing a Founder’s Agreement. The agreement should outline what each partner brings to the business, his/her roles, and how the business and its assets is distributed when the agreement is terminated. It should also demonstrate how and when the business will be terminated as well as methods for resolving disagreements among the founders. A Founder’s Agreement formalizes the initial planning conversations to ensure that there isn’t any confusion down the road when one party remembers the conversations differently than the other.

2) Non-Compete: It is important that you check your contract with your current employer for any non-compete clauses prior to transitioning full time in your startup, especially if your startup is in the same industry. Similarly, be sure to place a non-compete clause in your employees contracts to ensure that they cannot steal your trade secrets and become your competition.

3) Incorporation: Be sure to incorporate prior to raising capital as it will reduce the amount of tax that you pay when issuing yourself shares. If you delay incorporation until after you’ve raised a seed round your business will very likely have a much higher valuation and thereby holding you accountable for the increased value of those shares.

4) Social Media: Social media can be a business’ best friend or worst enemy. Remember that all posts on social media are public and permanent, so be careful what you post. Create a company social media policy to help ensure the proper use of social media among your personnel. Always handle online criticism with positivity, transparency, and professionalism.


5) Crowdfunding: Crowdfunding is becoming a rapidly growing method for raising capital. As a result, there are a lot of schemes that the government is trying to crack down on. Don’t put yourself at risk by overpromising and under delivering. Be sure to deliver on exactly what you promise. Also, be sure to read the terms and conditions for each site that you start a campaign on as they might be different from site to site.

6) Website: If you sell products on your website there are a few very simple compliance issues that you need to be aware of. For example, you are required to list your terms of service, terms of use, terms and conditions, and privacy policy on the bottom of the page. Don’t catch yourself in a legal quandary because you didn’t take the time or money to consult with a lawyer upfront.


7) Provisional Patent: Don’t wait until you start selling your product to protect your intellectual property. File for a provisional patent (or better yet, a utility patent) and protect yourself from day 1. Be cautions when speaking about your product to anyone outside of the company and do not share any trade secrets. Use non-disclosure agreements when appropriate, but realize that many parties, such as investors, will not sign them. Lastly, it is important to realize that, in most cases, you can discuss your startup/product/service without giving away anything that is truly proprietary.

8) Unpaid Interns: State and federal guidelines dictate whether an intern should be paid. Should they determine that you hired an unpaid intern that should be paid you could be liable t pay back pay, back taxes, and penalties. Be sure to learn your local laws and abide by them.

If you have a question about your Startup Funding or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Legal Tech VC Funding Beginning to Stagger

Legal Tech vs Funding Stagger from The Startup Garage

Legal Tech VC Funding Beginning to Stagger

Although the legal industry is massive ($300B), it is seeing a drop in funding by 16% year-over-year as investments are concentrated at the seed stage and exit activity is lukewarm. Funding to legal tech startups barely topped $100M across 30+ deals, with the largest deal representing 45% of total investments.

 

Deal Flow

Oddly enough, the industry actually experienced a 41% increase in deal activity despite the 16% decrease in actual funding as depicted in the graph below:

 

Although the legal industry is massive, it is seeing a drop in funding as investments are concentrated at the seed stage and exit activity is lukewarm.  The Startup Garage. TSG Enterprise.

Graph thanks to CB Insights.


 

Whether you have a question about Legal Tech VC Funding, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Hiring the Right Startup Lawyer

Hiring the Right Startup Lawyer from The Startup Garage

Hiring the Right Startup Lawyer

You own a young company that is seeking VC, angel or perhaps even seed funding.  You want to protect yourself with the right legal documents, ensure that you are taking the right steps and perhaps gain some legal counsel along the way.  You turn to your network circles for a recommendation on a good lawyer.  Before you know it, you are inundated with firms and you don’t know where to begin or which to choose.  Start with these basic criteria to begin eliminating those that aren’t right for you: startup focused, firm size and local.

Right Sized

For the most part, you’ll want to avoid working the large, national law firms.  The one caveat is if they have internal practices that focus on startups.  Otherwise, you’ll find yourself competing for attention with the larger clients that the firm represents.  On the flip side of the scale, make sure you do your homework with any local or smaller firm to ensure that they really have the startup expertise that you need.

Startup Focused

As in nearly every field of service providers, you’ll want to identify a specialist.  You wouldn’t hire a commercial real estate agent to find your next home.  You wouldn’t hire an action sports sales rep to push your medical device.  You wouldn’t hire a back-end software engineer to develop your user friendly website.  Similarly, don’t hire a lawyer that doesn’t specialize in startups.  Keep in mind, the entire firm doesn’t have to be startup focused, just make sure your lawyer is.  Furthermore, many lawyers that work with startups are open to working on a deferred payment schedule.

Local

Whether you are working with a local law firm or the local branch of a national firm, be sure to go with a local lawyer.  A local lawyer, especially one that is startup focused, can help tap you into their key networks where you may find potential funding sources, strategic partnerships or mentorship relationships.

In conclusion, do your homework and stick with local, startup focused lawyers that aren’t looking for bigger fish to fry and will give you the time of day that your company deserves.

 

Whether you have a question about Hiring a Startup Lawyer, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

The Importance of Copyright Assignments

The Importance of Copyright Assignments from The Startup Garage

The Importance of Copyright Assignments

A copyright isn’t a single right; it is a combination of rights. Copyright owners can transfer some or all of the rights. A full transfer of rights is called a copyright assignment. It’s important for start-ups to get a full copyright assignments for their logo, website, software, etc that is created for the company by independent contractors or service providers.

If you have not received a full transfer of rights from the original copyright owner, the author of the work, you most likely do not own the copyright. Think of it like buying a CD. You own the CD, but the band or record label owns the copyright to the book and you are not able to copy and sell it.

If you do not own the copyright to your website or software for example, the developer of that material can resell it or use it as they please. It is critical that you receive a written copyright assignment from the owner of the copyright or its agent as you will need to present this when registering for your copyright.

Whether you have a question about Importance of Copyright Assignments, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

How to Read a Patent – It’s All In the Claims

How to Read a Patent - It's All In the Claims from The Startup Garage

How to Read a Patent – It’s All In the Claims

It may seem simple, but reading a patent and fully understanding what the patent actually covers can be rather difficult.  Let’s begin by reviewing the main sections of the patent.  First, we have the patent identification information: the patent number, title, patent holder’s name, owner of the patent (if different), the filing date, the issue date and cited references.  Next, we have an abstract which outlines the type of the invention and its basic functions.  We then have the patent specifications which explain how to develop and use the invention.  We then have drawings of the invention.  Lastly, and most importantly, we have the claims, or the legal limitations that the patent covers. 

While the specification will cover the invention in general, it does not represent the patent’s legal coverage.  Claims are usually very specific and do not cover many of the key functions of the invention as described in the specification.  Claims come in two primary classifications, independent claims and dependent claims.  Dependent claims incorporate an earlier claim and an additional element making a new, slightly different claim.

Constructing your claim can be very difficult and will likely include several rounds of modifications during the patent prosecution process.  Saving money on your startup by claiming a patent on your own and avoiding the cost of patent and I.P. lawyers, may sound like a good idea.  However, if you are not familiar with the claims process, you will likely find that the process will be difficult and time consuming.  Even worse, your start-up’s patent may not cover key claims that will protect your invention down the road.

Whether you have a question about Reading Patents or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

What to Consider When Starting a Company With Your Spouse

What to Consider When Starting a Company With Your Spouse from The Startup Garage

What to Consider When Starting a Company With Your Spouse

Starting a business can be a risky endeavor (quitting your job, spending your savings, good potential for failure, and the list goes on).  Starting a business with your spouse can be even riskier when you consider your shared finances, your retirement funds, your relationship, your mental health and happiness.  Before you risk everything, ask yourself the following questions:

  1. Are you willing, able and ready to work together?  For any successful business, you must have a proper business plan.  Part of this plan should outline ownership, roles, responsibilities, etc.  Be sure that you and your spouse have a very clear understanding of each of these areas of the business.  The more that you can divide your roles and responsibilities in different areas of the business, the better you will be able to share power and minimize arguments.
  2. Can you mesh your personal and business lives seamlessly?  Be sure to draw boundaries so that you maintain some semblance of your romantic life.  Furthermore, make sure that you both have enough room to work so that when one is working with clients, or needs personal space or room to think strategically, there is not a conflict.  Lastly, make sure that you have developed an effective way of airing differences and resolving disputes.  You certainly will not see eye-to-eye on all aspects of the business.  The better system you have for managing these discrepancies, the more successful you will be at doing so and the happier you will be with one another.
  3. Are you clear with one another on what financial risks each is willing to take?  There is a good chance that you will not see eye-to-eye in terms of when it is time to call it quits.  By discussing your financial runway with one another and having a mutual understanding of when it is time to quit, you will save the headache and potential fallout down the road.
  4. Lastly, ask yourself, what comes first, the relationship or the business?  If and when times get tough, one of you may face the decision of having to lose the business to save the relationship.  Determine when enough is enough.

 

Even if you think you know your answers as well as your spouse’s answers to all of these questions, it is wise to sit down together and have an open discussion.  Whether you determine that you are on the same page and ready to push forward, or you find that you have too many differences and that it would be too risky to go into business together, this is a worthwhile practice that will help mitigate any potential risks associated with starting a business with your spouse.
 

Whether you have a question about Running a Business or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Stock Option Plan Rule of Thumb No. 5

Solidify Relationships from The Startup Garage

Stock Option Plan Rule of Thumb No. 5

This article was contributed by William W Eigner, Esq. & Brian Headman of Procopio, Cory, Hargreaves & Savitch LLP.

Try Not To Jeopardize Relationships

Up-front communication of a director or advisor’s term of service and duties helps to foster a healthy relationship and facilitate a potential termination without jeopardizing relationships. For start-ups, relationships can be an incredibly valuable asset, and although a businessperson’s term of service to the company ends, he/she may remain a resource for years to come.  Importantly, the director or advisor’s tenure should be productive and the rapport built with one another should remain productive in the future.

Assigning duties can be tricky. Because directors have fiduciary duties, additional explicit duties do not normally need to be defined, although some companies have explicit director agreements. For advisors, I recommended that companies avoid too much specificity, but nail down the length of service and the option terms, include an indemnification provision, and provide for confidentiality in a written advisor agreement, the term of which may be terminated at any time. When expectations are clear, everyone is happier.

Conclusion

Ultimately, equity-based compensation should motivate independent directors and advisors by offering them a favorable, but fair, vehicle through which they can profit. Favorable conditions, such as a short vesting schedule and an extended post-termination exercise period, promotes director and advisor interest and keeps them driven. If used properly, a stock option or other equity incentive plan solves a number of problems at once: it helps preserve cash, it serves as a powerful tool for recruiting talent, and it offers a compensation structure that aligns incentives with interests and promotes dedication to growth and success. Establishing and administering a plan is not always easy, but with these five rules of thumb and a solid compensation strategy, everyone can succeed.

Stock Option Plan Rule of Thumb No. 4

Stock Option Planning from The Startup Garage

Stock Option Plan Rule of Thumb No. 4

This article was contributed by William W Eigner, Esq. & Brian Headman of Procopio, Cory, Hargreaves & Savitch LLP.  

Set a Lenient Post-Termination Exercise Period When Possible

If a director or advisor’s term is discontinued, a lenient post-termination exercise period may be very valuable to an option holder. I advise clients to draft the option grant to permit exercise up to ten years after termination, depending on when the option was granted in relation to when the option plan was adopted. This is because most small companies do not have quick and easy exits, it is onerous to require directors and advisors to pay cash for shares in a company that is far from a liquidity event.

My argument for this method is that subjecting a director or advisor to the typical 30-day to 90-day post-termination exercise period used for an employee optionee holding Incentive Stock Options (ISOs) would be unduly harsh on directors and advisors. Employee optionees holding ISOs receive other forms of compensation, while directors and advisors of start-ups typically do not.

Check back Wednesday, October 3, for Rule of Thumb No. 5: Try Not To Jeopardize Relationships.

 

Whether you have a question about Stock Options, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Stock Option Plan Rule of Thumb No. 3

Advisor and Director Share Schedule from The Startup Garage

Stock Option Plan Rule of Thumb No. 3

This article was contributed by William W Eigner, Esq. & Brian Headman of Procopio, Cory, Hargreaves & Savitch LLP.  

Subject Director And Advisor Shares To A Two-Year Vesting Schedule

Directors assume general corporate law fiduciary duties and potential liability from the very first day they serve on a company’s board. For this reason, independent directors expect to be compensated beginning day one. Highly sought after advisors expect similar rewards. Gradually vesting a director’s and advisor’s options align their compensation with their actual service while protecting the company in the event that they are prematurely removed from the board. In this circumstance, vesting only allows a short-lived director or advisor to receive the fraction of the option package that corresponds with the director’s or officer’s actual term of service.

Subjecting a director’s shares to a two-year vesting schedule also creates added performance incentive. By default, corporate directors are normally on a one-year term of service. Using a two-year vesting schedule encourages a director to perform well so that he or she is retained for a second term. Moreover, the two-year vesting schedule—as opposed to the four-year schedule typical of employee options—is preferred for directors because it magnifies the incentives for these influential individuals.  Options issued to advisors are typically treated the same, so long as the advisor is not otherwise being compensated by the company.

Vesting should be accelerated in the event of a change of control. Many directors and advisors will not serve on a board if this provision is not included. If the board determines that it is in the best interests of the shareholders to sell the company, the directors and advisors should not be restricted from sharing in the value of the acquisition merely because their shares have not yet vested.

Check back Monday, October 1, for Rule of Thumb No. 4: Set a Lenient Post-Termination Exercise Period When Possible.

 

Whether you have a question about Stock Options No. 3, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!