The 5 Most Common Legal Mistakes Internet Entrepreneurs Make – and How to Avoid Them
Starting your own internet company and making a living from the comfort of your couch may sound like a far-fetched dream. But now, with as little as a laptop and internet connection, you and your best friend can forego traditional office watercooler politics and policies and run a company from your parents’ garage.
While working from the corner in the garage of your parents’ house, it’s easy to forget about the legal consequences that may affect your company down the road. After all, why should a company that records finances on McDonald’s napkins and conducts board meetings in their sweatpants need to form an S-corp or trademark their logo?
Establishing a proper legal framework for your company now will save you money, time, and even potential future litigation.
Below are the five most common legal mistakes internet entrepreneurs make and how to avoid them.
For example, the California Online Privacy Protection Act (CalOPPA) requires businesses to conspicuously post their privacy policies on their websites or subject themselves to private claims, civil fines, or equitable relief.
- Terms and Conditions: Terms and conditions agreements are legal agreements that set forth the requirements, standards, and rules of your website. They are not required by law, but are highly recommended as a safeguard against user abuse of your website and excessive liability as the owner. T&Cs are usually drafted by looking to well known sites with thorough agreements or by using a comprehensive terms and conditions generator.
A thorough agreement will address the following:
- Warranties, disclaimers, indemnifications, and other representations
- Any limits or restrictions on site use
- Site owner, employee, and director liability
- How disputes shall be resolved (arbitration, mediation, informal negotiations)
- Intellectual property rights
2. Inaccurate and Unclear Website Contact Information
If clients and customers are unable to get in touch with you regarding price, feedback, or general inquiries, your company may be doomed from the start. Open and visible contact information on your site creates transparency and increases confidence and trust in your product and service.
Without such conspicuous information, there is a higher likelihood of customers thinking you are running an unprofessional business, or even a scam. Make sure your contact information, contact forms, and support channels are explicit and obvious.
Also, check to make sure that your domain name registration coincides with your product and website. A noticeable discrepancy between your company and the domain registration could set off alarm bells for potential clients. For example, if you run a successful online retailing operation out of New York, it may look a bit fishy if the domain is registered using your home address in Washington state. Stick with uniformity and transparency.
3. Insufficient Intellectual Property Protection
Companies’ successes and failures depend on their ability to protect and preserve intellectual property (IP). Failure to protect one’s IP can have long-lasting and catastrophic effects, namely competitors and outsiders gaining inside knowledge into your technology, product, service, or logo and disrupting your place in the market, depriving your company of due compensation.
- Recognize your IP: Taking a step back and listing your products, services, and any identifying marks will allow you to assess whether or not you need to file for protection. After all, you can’t protect it, if you don’t know it’s there.
- Properly classify it: Make sure you understand the difference between a copyright, trademark, and patent. Filing for a patent, when really needing a copyright, can leave your work exposed and unprotected.
- Register and file with the appropriate office as soon as possible: The early bird gets the worm in the world of IP protection. “First in time” controls, and failing to register a mark, patent, or copyright in time (or at all) can lead to your exclusion from rights in your creation.
4. Improper Employment Documentation
Just because your company is online and lacks a traditional HR department and formal hiring process doesn’t mean you can forego preparing essential employment documentation. Internet entrepreneurs and startups should formulate and require a core set of employment documentation that all employees must sign.
Such documents generally include:
- Employee Handbook: To outline general information about the company, including hiring and firing procedures, leave policy, and company culture.
- Non-Disclosure Agreements: To prohibit and limit the dissemination of proprietary information by employees to third parties. An essential for protecting company intellectual property, trade secrets, and other important know-how.
- W-4 Form: Requires employers to withhold a certain amount of federal income tax from employees’ pay.
- Form I-9: Used to verify the identity of all paid employees in the U.S.
- Employee Benefit Forms: Documents for employee health insurance, profit sharing, 401k pensions, and vision and dental plans.
5. Choosing the Wrong Legal Entity
Understanding and taking advantage of specific tax benefits can help keep your company stay afloat by saving money. Choosing the legal entity that is best for your company is an important step to shielding yourself and your company from unnecessary taxes and liability.
- S Corporations are corporations that choose to divvy income, losses, credits, and deductions to their shareholders. Doing so, requires shareholders report income and losses on their personal tax returns and prevents a corporation from being double-taxed on their corporate income. To find more about the requirements for becoming an S corporation, look to the IRS guidelines and requirements.
- C Corporations are corporations that are taxed independently from its owners. By default, all corporations that are “for-profit” are labeled as C corporations, unless they choose to be an S corporation.
- LLCs limit liability for everyone, except for the owners. LLCs are treated like partnerships, and sole proprietorships and partners are taxed personally. The LLC itself is not required to pay taxes or file returns with the IRS.
Zachary Paruch is a product manager and legal analyst at Termly, where he helps to develop legal policy software for small businesses. When he’s not saving SMBs from lawsuits and financial ruin, he can be found playing soccer, binging a Netflix series, or getting a beer with some good friends.