Launching a tech startup in the United States is an ambitious and rewarding journey, but it takes more than just a great product to succeed. Establishing a strong legal foundation is just as critical as the innovation itself. In fact, 19% of startups fail due to legal issues, often because founders overlook the importance of compliance from the very beginning. To help you avoid these pitfalls, we’ve highlighted 5 key types of US laws for tech startups every founder should know before launching their tech startup.
Business Structure and Registration Laws For Tech Startups In The US
Choosing the right business structure is one of the first and most important legal decisions you’ll make when launching your tech startup. Your business structure affects everything from personal liability to taxes, so it’s essential to understand your options before moving forward.
According to the US laws for tech startups, businesses can choose from several types of corporate structures, each with their own pros and cons. Below are the most common types:
- Sole Proprietorship
This is the most straightforward and common form of business structure, owned and operated by a single individual. While it’s easy to set up, the biggest downside is that you’re personally liable for any debts or legal issues the business faces. It may also be difficult to raise capital, as investors prefer more formal business structures with limited liability protections.
- Partnership
A partnership involves two or more people running a business together. In tech startups, partnerships often form between co-founders with complementary skills, such as a software developer and a business strategist. Partnership offers benefits like resource pooling, pass-through taxation, and collaborative decision-making. However, partners share liability for debts and may face disagreements, which could potentially derail the startup. Therefore, it’s important to draft a solid partnership agreement to clarify roles, responsibilities, and profit-sharing.
- Corporation (C Corp and S Corp)
A corporation is a formal and legally distinct business structure that provides a high level of legal protection for its owners, known as shareholders. It’s typically suited for businesses planning to raise venture capital or go public.
- C Corporations (C Corp) allow tech startups to raise capital by issuing stock, which is great for growth. However, they face double taxation and require a lot of paperwork and strict rules.
- S Corporations (S Corp) avoid double taxation by passing profits and losses to shareholders’ personal tax returns. They also provide limited liability, but S Corps have restrictions, like a limit on the number of shareholders.
S-Corps have specific limits on who can qualify. Check the IRS website to see if you’re eligible.
- Limited Liability Company (LLC)
This business structure combines the flexibility of a partnership with the liability protection of a corporation. It shields your personal assets from business debts, making it a popular choice for tech startups. LLCs offer flexible management, pass-through taxation, and limited liability protection. However, forming an LLC can be more complex and expensive than other structures, and state laws vary, which can complicate national expansion. Additionally, some investors prefer corporations due to their predictability.
Each structure has distinct legal requirements, often influenced by state and federal US laws for tech startups. Here are some critical laws you should understand:
- Small Business Act (SBA) supports small businesses by offering resources, funding options, and federal protections. It also enforces federal US laws for tech startups related to fair practices and nondiscrimination in small business lending.
- Delaware General Corporation Law (DGCL) makes Delaware a leading choice for business incorporation in the United States. It provides business-friendly laws, including flexible governance structures, clear definitions of directors’ fiduciary duties and shareholders’ rights, and efficient dispute resolution through the Court of Chancery. Its favorable tax policies and regular updates ensure it meets the evolving needs of modern businesses.
- Delaware Limited Liability Company Act provides a flexible and efficient framework for startups forming and operating LLCs. It streamlines the formation process, requiring a Certificate of Formation and a registered agent, while offering limited liability protection for members.
- California Corporations Code provides a comprehensive legal framework for forming, operating, and dissolving business entities in California. It outlines requirements for Articles of Incorporation, corporate governance, and shareholder rights, and offers provisions for specialized entities like professional and close corporations.
Intellectual Property Laws For Tech Startups
When you’re building a tech startup, your ideas, products, and innovations are your biggest assets. Protecting them with intellectual property (IP) laws is essential to keep competitors from copying your work. Here’s a quick overview of three important types of IP US laws for tech startups you need to know:
- Trademarks
A trademark can be a word, phrase, symbol, design, sound, color, or anything else that helps identify your brand and distinguish your business from others. Trademarks ensure that no one else can use a name or symbol that’s confusingly similar to yours, which is vital for building a strong, recognizable brand. You can register your trademark with the U.S. Patent and Trademark Office (USPTO) to gain exclusive rights to use it in commerce.
Relevant U.S. Law: Trademark Act (Lanham Act) .
- Patents
Patents protect the rights of inventors. If you’ve developed a unique technology or product, securing a patent prevents others from making, using, or selling your invention without your permission. You can apply for a patent with the USPTO, and it can last up to 20 years.
Relevant U.S. Law: Patent Act.
- Copyrights
Copyrights protect original works of authorship, including software code, designs, written content, and other creative works. While copyright protection is automatic once these works are created and fixed in a tangible form, registering your work with the U.S. Copyright Office strengthens your legal protection. It makes it easier to enforce your rights in court and seek compensation if someone uses your work without permission.
Relevant US law for tech startups: Copyright Act.
READ: How to Find a Competitive Advantage for Your Technology Startup
Tax US Laws For Tech Startups
As a tech startup founder, it’s crucial to understand the tax responsibilities your business will face to avoid potential audits, fines, or penalties. One of the first things you need to do is register your business with the IRS and obtain an Employer Identification Number (EIN). This number is essential for tax filing, opening bank accounts, applying for licenses, and ensuring your business is compliant with federal tax regulations.
Once you have your EIN, it’s time to familiarize yourself with the main tax categories your business will encounter:
- Income Tax
Every business in the U.S. must file an annual income tax return. How your taxes are calculated will depend on your business structure (LLC, S Corp, or C Corp). Each structure has its own set of tax rules and benefits, so it’s essential to understand these distinctions. For example, C Corporations are taxed separately from their owners, while S Corporations allow income and losses to pass through to shareholders to avoid double taxation.
- Employment Tax
If your startup hires employees, you’ll need to manage several employment taxes according to US laws for tech startups. These include Social Security and Medicare taxes (FICA) and the Federal Unemployment Tax Act (FUTA) tax. As an employer, you’ll also be responsible for withholding federal income taxes from your employees’ wages and submitting them to the IRS.
The Internal Revenue Code (IRC) is the foundation of federal tax law in the United States. It governs all tax-related matters, including income tax, employment tax, deductions, credits, and penalties.
READ: Payroll Software: Choosing The Best Option
Employment US Laws For Tech Startups
Employment laws, also known as labor laws, are essential for regulating the relationship between employers and employees. These laws ensure fair treatment, protect workers’ rights, and establish guidelines that promote a balanced and lawful workplace.
A foundational U.S. law to understand when launching a startup is Fair Labor Standards Act (FLSA). The FLSA sets the federal minimum wage at $7.25 per hour and establishes standards for overtime pay, employee classification, and child labor. For employers, compliance with FLSA is crucial to avoid legal risks.
For instance, the FLSA includes specific provisions regarding exemptions for certain employees. Those earning a salary of at least $455 per week (subject to periodic adjustments) and who fulfill the duties criteria for executive, administrative, or professional roles are typically classified as “exempt.” As a result, they are not entitled to overtime pay, regardless of the number of hours worked beyond the standard 40-hour workweek.
Privacy and Data Protection Laws For Tech Startups
Consumers and employees value the privacy of their personal information, making it essential for your tech startup to communicate transparently about how you collect, store, and use data. Whether it’s safeguarding email addresses or securing payment details, maintaining trust is key.
Here are some important privacy and data protection US laws for tech startups that could impact your business:
- Privacy Act of 1974 governs how federal agencies collect, store, and use personal data, setting a high standard for privacy practices. While it directly applies to government entities, its principles serve as a model for startups handling personal information. Key provisions include allowing individuals access to their data, requiring consent before sharing personal information, and minimizing data collection to only what’s necessary.
- Children’s Online Privacy Protection Act (COPPA) applies to online services or websites directed at children under 13 years old. It requires businesses to obtain verifiable parental consent before collecting, using, or disclosing personal information from children.
- Health Insurance Portability and Accountability Act (HIPAA) applies to businesses in the healthcare industry, setting national standards for the protection of health information. If your startup deals with any healthcare data — whether it’s patient records or healthcare providers — you must ensure your practices comply with HIPAA’s privacy and security rules.
- Family Educational Rights and Privacy Act (FERPA) governs the privacy of student education records. If your startup is involved in the education sector and handles student data, FERPA ensures that the records are not disclosed without proper consent.
- General Data Protection Regulation (GDPR) imposes strict requirements on obtaining consent, data handling, and providing transparency in how personal data is used. Although GDPR is a European law, it applies to any company, including U.S.-based startups, that processes personal data of EU residents.
Understanding these five key legal areas ensures your tech startup is built on a solid foundation, avoiding costly mistakes and enabling long-term success. At JetSoftPro, we help tech startups tackle challenges with expert solutions tailored to your needs. Contact us today to start your journey with confidence!
