If you're building a house of almost any kind, you'd start with its frame. The same goes for building a company: A startup needs the right legal structure, especially to raise money. That's the first step Chambliss Startup Group says a budding business should take.
Organized five years ago, Chambliss Startup Group numbers about a dozen lawyers under one of Chattanooga's largest law firms, Chambliss, Bahner & Stophel. Put simply, its purpose is to meet the legal needs of entrepreneurs.
Startups' legal needs do not end with the registration of a new corporation or limited liability company. Step two requires a new company to protect its intellectual property - the ideas, technology and techniques that are at the heart of many startups, according to Chambliss Startup Group.
Beyond office work, the group is a sustaining sponsor of Chattanooga business accelerator Co.Lab, and its lawyers provide dozens of pro bono hours each month to support Co.Lab activities, and they provide legal advice and services to participants in Co.Lab's GigTank. Chambliss Startup Group lawyers also helped with parts of the curriculum for Co.Starters, the Chattanooga-based business development program, and they teach legal issues to participants in University of Tennessee at Chattanooga's Veterans Entrepreneurship Program.
Q&A with Chambliss Startup Group Chairman Jason R. Mirmelstein
Edge: What should a startup consider in deciding how to organize itself in terms of business structure?
First and foremost, a startup needs to determine whether it needs the liability protection that a limited liability company or corporation provides. For most businesses, the answer is yes. In determining whether an LLC or corporation is preferable, the answer usually comes down to how the startup wants to be taxed, who the owners of the business will be and what form of internal governance best suits those owners.
Edge: How can a startup best protect its idea?
It really depends on the nature of the idea. If it is a patentable idea, applying for and obtaining a patent provides 20 years of very strong, enforceable protection against others using or exploiting that idea. Trademark and copyright protections are also very strong protections available for the right types of ideas. Filing trademark registrations on the unique logos and other marks by which startups brand their company is usually advisable and, if done, makes it much easier to protect the individuality of that branding. Other ideas that may not be patentable or right for trademark or copyright protection could be protected by having owners, employees and, in some cases, even other businesses sign confidentiality and non-disclosure agreements.
Edge: What are the most common and avoidable mistakes you see startups make in terms of legal issues?
The two main mistakes I see are assuming that because a friend or mentor used a corporation or LLC that that form of entity necessarily makes the most sense for someone else's startup, and two, not reducing to an agreement at the outset how the business will be operated, how profits and losses will be allocated and paid out and how, if at all, ownership in the business may be sold or otherwise transferred.
Edge: What other things should startups consider?
It is very important for a startup to understand how much money it will need to execute the strategy that led it to get into business in the first place. Also if there is more than one initial owner of the startup, it is also very important that everyone understands the financial and governance deal everyone will be operating under and reduce that deal to writing in the form of an operating agreement for LLCs or a shareholders' agreement for corporations. It's important to do this at the outset, when the deal is fresh in everyone's minds and everyone still likes each other.