The entrepreneur's seven sins: common legal mistakes can end your business before it starts.

• Author: Spendlove, Gretta
• Position: EntrepreneurEdge

Lust, envy, gluttony, sloth, greed, anger and pride--those were the seven deadly sins to medieval men hoping to enter heaven. What are the serious mistakes that prevent today's entrepreneurs from reaching their goals?

1 Creating the business entity too late or incorrectly

Entrepreneurs sometimes jump the gun by entering into contracts before they've created their company. Sometimes they act in their own name and sometimes in the name of a company that doesn't yet exist. A limited liability company (LLC) or corporation is not created until articles of organization (for an LLC) or articles of incorporation (for a corporation) have been filed with the proper state entity and accepted. If entrepreneurs act in the name of the company without it being correctly created, the results can be harsh. As the Utah LLC Act states, "All persons who assume to act as a company without complying with this chapter are jointly and severally liable for all debts and liabilities so incurred ..."

2 Being ambiguous over what's expected from company investments

True story: Bob provides $50,000 to Company B and receives a 40 percent interest in the company. Later, Bob claims that the $50,000 was really a loan and must be paid back, but that he will still own his 40 percent interest even after the "loan" is repaid. What he gave for his 40 percent interest, Bob claims, was the availability of financing, not the money itself. Subscription agreements and other company documents should clearly specify the consideration which is being given for ownership interests. Some people give cash; others give real estate, intellectual property, guarantees, time or expertise. Huge fights can arise from disagreements over what was promised by founders and investors.

3 Failing to include vesting or buy-out provisions

What happens if a founder promises to provide services or cash, but fails to do it? What happens if a founder gets tired of the business grind and wanders off? Subscription agreements or other contracts with founders should include remedies if a founder fails to stay with the company or fails to perform. Membership interests or stock might not "vest" until several years after an individual receives them, and might be contingent on performance, The primary founder, or the company, might have the right to buy out owners for nominal amounts if they disappear or fail to perform within a certain period of time.

4. Accepting money from investors without considering securities...