lean-startup, contracts, freelancingI was wondering that if I want to start a start-up with sole proprietorship but hiring freelancers on the go for miscellaneous tasks (since no one is jack-of-all-trades) what legal issues I may run into?
An important concern is that for example
and the idea worked and I started earning a fair income and profits, can a freelancer claim his rights on my profits?
Is it better to ask each freelancer sign an NDA before letting him start a work? Do NDA’s hold only when a business organisation has been established or can they also be between two people: One the idea giver and another the idea maker?
As long as your freelancer gets paid appropriately, there should not be any legal issues. Problems may arise if you give a low salary and the freelancer is under the impression that participating in the start-up is part of his salary. Make a written contract which clearly defines the salary and the rights on the work, i.e. all rights belong to you / your company.
NDAs can also be signed between two persons. However this is an independent question since the NDA only states that your freelancer may not tell anyone about your business, it does not state who has which rights on a product.
It is about more than legal issues here.. it is also about the tax implications of remaining a sole provider.
I would recommend that you incorporate as at least a S Corp. Though if you are going to have employee’s you might want to go full boat C Corp. By doing that one year (with no employee’s), I more than HALVED my tax liability.
You will also have to issue 1099 forms to the contractors, and you will have to pay taxes on your earnings. Also, you want to protect your personal assets. All valid reasons to incorporate (besides the fact that you will halve your tax liability).
In part I agree with Michael and in part I disagree. #1 I don’t think you are quite ready to start your business. You have an idea, but you have no idea where you are going with it. Write a business plan. At this point it does not have to be formalized or be in great detail. But you need one. The are many places that provide “good” FREE advice. Get some to get your business plan started. #2 Yes you need a NDA, but more importantly you need a contract with anyone who you want to help you. And get the contract signed BEFORE any work is done. The NDA can and should be part of the contract. Do not do the FINAL document yourself, unless you are lawyer. If there is a problem, you need your contract to hold up in court. However, to get started, pull off some sample contracts and NDAs from the net. Revise them how you think they should be. Then take your DRAFT to one of the FREE lawyer advisers. They won’t opine on the agreement, but they could make it better, so when you do take it to a lawyer, you will save fees. #3 Until you have some risk, stay a sole proprietor. There is no need to to form an entity until you have risk (ie potential liability). Again, back to the FREE advice, ask an accountant (not a bookkeeper) when you might have risk. Then evaluate the risk. If you have nothing to loose, wait till you do. You don’t need any entity yet. An entity costs money to form and to maintain. Your money is better spent.(Also I think there are better choices for startup entities.) #4 Your freelancer claim YOUR profits? Unless you make an agreement either written or oral to do so, probably not. Your greater risk is that if your contract is not properly written, the freelancer can steal your idea and maybe get away with it. #5 Michael is correct regarding filing tax forms. Again, go to the FREE advice to learn about it. There is some good (and some bad) information about your tax filing responsibilities on the net. Get somewhat familiar with it and then go get the advice. And yes I have done this before, many times.
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