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February 01, 2024 | Katelyn Keenehan

What are the legal pitfalls of starting a business?

Melissa Centers provided entrepreneurs with five tips for staying legally on track with their startups.

Students in the Haslam College of Business at the University of Tennessee, Knoxville (UTK) gained insight into the legal pitfalls of entrepreneurship on Thursday afternoon. The annual “Lunch and Learn” series by the Anderson Center for Entrepreneurship and Innovation (ACEI) features industry experts in an ask-me-anything format. The first session of the semester invited Melissa Centers, a consultant and attorney who provides integrated strategic advice and support to boards of directors, founders, and companies of all sizes. She is also one of five entrepreneurs in residence at the ACEI.

Tip #1 Stress Test

“First and foremost, stress test. I am a big believer in stress testing,” Centers said.

Stress testing is all about strengthening the working relationship between two business partners. Centers explained how many co-founders start a business with a colleague, and don’t consider all the ways the partnership could go sideways. For example, there could be disagreements about exit strategy, company structure, allocation of tasks, and personal incidents. If a partnership split happens, who has the rights to revenue, personnel, intellectual property, or the patents? These are questions co-founders will want to agree upon before going into business together.

“Everyone thinks everything will be easy and agreeable until it’s not,” she said.

Tip #2 Comply Comply Comply

Maintaining a good relationship with federal and state compliance officers will benefit the business in the long run. Officials are more likely to understand shortfalls when a company is communicative upfront.

“Some people are in the business for a lifetime and never have any issues with compliance, and other people are in business for just six weeks before they have a compliance issue,” Centers said, reinforcing the reality that any part of your business could come to light at any time.

She said the best advice is to build a reputation of being compliant. Also, if you aren’t naturally organized with filing paperwork and meeting deadlines, then you either need to hire someone who is, or reconsider starting a business. There is a lot of paperwork involved.

Tip #3 Treat people with respect

The easiest way to not get sued is to not make any enemies. It seems like a simple token of advice, but each year several companies face lawsuits about discrimination, unsafe work conditions, and rights in the workplace.

“If you take money from people (and investors), then pay them back. If you hire people, treat them well,” Centers said.

Tip #4 Maintain good documentation

One of the biggest areas that people have legal shortfalls in business is in project management, Centers said. She said documentation is one of the most important parts of maintaining a business. Having thorough processes on the front end, prevents an attorney from having to come in and fix problems on the back end.

“The little $2,000 or $5,000 fines will start to add up, and they can kill your business,” she said.

Tip #5 Don’t over lawyer

“You cannot lawyer your way out of risk in business,” she said. “Somebody, somewhere at some point will try to sue you over something, because that’s the American way.”

Centers explained that many first-time entrepreneurs focus too heavily on their intellectual property, securing a patent, and protecting their systems. They are so afraid that their IP will be stolen, that they spend thousands and thousands of dollars in fees to protect it.

The next Lunch and Learn session is on February 22. It will feature entrepreneur Mark Huber, who is the Co-Founder and Vice President of Business Development at iSustain.

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