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How to avoid liability when launching a startup

On Behalf of | Apr 22, 2024 | Business Law |

A new business is at its most vulnerable when it is first starting. Most startups fail within their first year. Unfortunately, some fail from consequences that could have been prevented with better planning and preparation. A good place to start is avoiding unnecessary liability and harm.

Start the business as a corporation or an LLC

New business owners often start their businesses as a sole proprietorship. Sole proprietorships require no documents or fees other than what is required by state and local governments. However, in terms of liability, these legal entities are often just an extension of the owner. If the company gets sued, the owner and all of their assets are at risk. 

In contrast, corporations and LLCs (limited liability companies) are legal entities that protect their founders from third-party liability. In a lawsuit involving the business, only the company would be liable, not the owner.

Retain an experienced attorney

New startups should hire experienced legal counsel whom they could turn to for legal advice. Owners can lean on their attorney for guidance before making complex business decisions. Focus on finding law firms with experience in areas of the law that pertain to your business. Some common areas to consider are:

  • Tax law
  • Real estate law
  • Data security and cyber law
  • Franchise law
  • Employment law 
  • Contract law
  • Corporation, securities, and commercial law
  • Trademark and copyright law 


Before ever taking their first customer, new companies should obtain liability insurance. If a person trips and gets injured on company property, that company could be the target of a lawsuit. Liability insurance offers protection from unforeseen events.  

If the startup deals with financial planning, insurance brokering, or investments, it should also consider purchasing errors and omissions (E&O) insurance. E&O insurance protects against claims of inadequate work or negligent service.

Protect your intellectual property

Without proper steps to protect its intellectual property, a startup can lose a lot of hard work. For example, an individual could place a patent on a company’s original product if the company failed to do so promptly. If the business’s success depends on a patent registered by someone else, it may face severe hardships to recover. Though there may be ways to recover ownership over an item, it is not an easy process, nor is the outcome assured.

Protect your data

Failing to have a backup data plan can create difficulties if a natural catastrophe or unforeseen circumstance hits a business. Cloud storage is an excellent option for backing up digital data, especially if the firm is based online. It’s also essential to establish a plan to secure non-electronic records. Permanently losing business documents will hurt the company’s reputation and potentially open it up to a breach of contract lawsuit.

Ensure you are appropriately licensed and registered

A startup should obtain the appropriate documents needed to operate legally and avoid fines levied from local ordinances. Some requirements to consider include:

  • Zoning permits
  • Seller’s permits
  • Home-based business permits
  • Sales tax license
  • Industry-specific permits

Proper planning can significantly support the success of a new business. New firms should always plan well ahead, with all necessary resources to ensure they are protected from events and circumstances that can otherwise cause them to close their doors. 

FindLaw Network
Chenoweth Law Group