8 LEGAL POINTS TO CONSIDER BEFORE YOU START A BUSINESS
The startup landscape in the UK
The UK government defines small and medium sized enterprises as any business that has less than 250 employees.
Some interesting stats:
In 2017, there were 5.7 million businesses in the UK.
Over 99% of businesses are Small or Medium Sized businesses – employing 0-249 people.
5.5 million (96%) businesses were micro-businesses – employing 0-9 people.
Microbusinesses accounted for 33% of employment and 22% of turnover.
In London, there were 1,519 businesses per 10,000 resident adults.
There were 414,000 business births and 328,000 business deaths in 2015.
21% of SMEs are female-led, and in 28% of FTSE100 board members were female.
Start-ups account for a high proportion of these numbers but they also face the biggest challenges as they must achieve creating a business that is both agile and legally compliant, at a low cost.
It is often the case that startups focus all their efforts on getting their service or product off the ground and that’s understandable. However, it’s also a reality that a large proportion of our clients come to us to help them get out of sticky situations that end up costing more time and money than it would have to prevent it in the first place. Simple steps like getting your contracts checked or setting out your business terms in a written agreement with your clients can save pain, time and money in the long run while giving you the peace of mind that you are doing things the right way.
Here are the eight priorities we think you need to consider before you start your business:
1. Business Structure
Your business structure affects how much you pay in taxes, your ability to raise money, the paperwork you need to file, and your personal liability. The most common business structures are acting as a sole trader, a partnership or a limited company. Each of them have their own advantages and disadvantages. You need to carefully choose the business structure that is best suited to your trading and your needs.
2. Shareholder Agreement
One of the most common reasons companies fail, is a disagreement between the shareholders or co-founders. Even though there is no legal requirement to have a formal shareholders agreement, every company with more than one shareholder is well advised to have one. Having a shareholder agreement in place, ensures that the responsibilities of the shareholders are clearly stated, there is clarity and certainty as to what can or cannot be done and decisions are taken by consensus and discussion. It is also a way to create incentives to motivate a shareholder to act in the best interests of the company, for example by introducing a vesting schedule and specific milestones. A shareholder agreement like any contract, will reduce the potential for conflict between shareholders and help the company to be run smoothly.
Having a shareholder agreement will impress investors who will be more likely to invest in a business where these legal documents are ready and signed.
4. Business Terms
The commercial objectives of a business require clear terms and conditions to be in place and agreeing on a set of terms that you will work against with your clients or suppliers is imperative to the successs of your business. Practical issues such as cashflow for example, can be severely impacted if this is not taken seriously. The founders must always remember that the only proof a business can rely on is what is in writing.
Ensure that your terms specify exactly what you want them to. This is often easier said than done however, uncertain terms can put your business at risk. Both parties should know exactly what the contract means. The very exercise of drafting your business terms will be useful as it forces you to think about specifics and uncover potential pitfalls that you may not have though of before. A business will operate smoothly if the parties understand their duties, rights, roles and responsibilities.
The most important things to include in your business terms are a clear definition of the relevant products and services, payment terms, guarantees and warranties, relevant service delivery timelines, what happens when things go wrong, the duration of the agreement and what happens after the agreement has terminated.
While it is important for every business to look after its clients, it is also crucial for the founders to look after themselves and the business in terms of any possible risks in the future.
The law says employers liability insurance is essential. This will cover any claims made by employees if they are injured or suffer any damages due to working at your business.
Professional indemnity insurance is also a good idea. Nobody likes to think about it but mistakes do happen - this type of insurance can help protect companies being crippled by compensation claims. Litigation is expensive and so insurance can be taken out for any legal costs that you may incur to defend a claim.
6. Protecting your Intellectual Property
Before you begin to launch products and raise awareness about your brand, you will need to ensure that your businesses core assets are safeguarded. On an even more fundamental level, it is also wise to protect your logo, brand and domain. Registering your logo as a trademark will safeguards the visual identity that you have cultivated over time.
In the case of your domain, you may also want to consider buying similar domains to prevent potential rivals from competing directly with your business. If you have a .com address associated with your brand name, for example, you may also want to invest in the .co.uk and .net alternatives.
A final thought for protecting your IP is to be aware of valuable trade secrets. They only maintain their value if they are kept secret. Employment contracts and non-disclosure agreements specifying what is expected of employees in terms of confidential information is key. If there is ever any infringement of the trade secrets in the future, the more documented evidence the better.
7. Agreements with employees and contractors
Employees and contractors play a big part in the value of a company. Their contracts can either add to or diminish this value. Employment or freelancer contracts should specify important information such as who owns the intellectual property that is created in the course of their activities, confidentiality rules and what is to happen when the employee or contractor decides to go and work for a competitor.
8. Getting legal support
If you operate in a tightly regulated sector (such as financial services, which is controlled by the FCA) or consumer electronics, for example, you may need to employ a legal or compliance team to guarantee the integrity of your products or services. When you start out, it is also imperative that you establish a series of processes that enable you to comply with regulations as your company grows without creating too much of an overhead.
In more relaxed industries, you may be able to outsource legal tasks on the basis of each individual project, saving money and reducing your annual wage bill.