Starting a new business takes careful planning, research and very often a leap of faith! But there is a lot you can do to minimise your legal risk and give your start-up a boost:
1. Legal Structure
The legal structure for your business should be thought through carefully. You might prefer to operate as a sole trader to start with (you can always incorporate later down the line) but remember that as a sole trader your liability will be unlimited so you’ll be personally liable for business debts if things go wrong. The most common structure is a private limited company. Incorporating a company can offer credibility to a start-up and the liability of the shareholders is limited to the face value of their shares, which is a big advantage. There is some red tape – you’ll need to register at Companies House, make Companies House filings and produce accounts each year, but don’t be put off. A good solicitor can guide you through.
2. Shareholders Agreements
If you decide to incorporate a limited liability company and you have more than one shareholder, a Shareholders’ Agreement is key. Setting out the shareholders’ and directors’ rights and responsibilities from the outset will prevent problems down the line (it’s also particularly useful when you’re acting as both!) and you can also set out how and when any shares in your company can be sold to third parties. The day-to-day management of the company should be left to the directors and a list of ‘reserved matters’ should set out those matters requiring the consent of the shareholders. For example, junior-level recruitment might be left to the directors, whereas management position appointments might be subject to shareholder approval. A Shareholders’ Agreement can be tailored so that different approval pass-marks apply to different matters (e.g. company critical matters require unanimous shareholder consent, whereas other matters a majority). A good solicitor will provide you with a precedent set of reserved matters for discussion before any documents are drafted.
3. Consultants and Introducers
All businesses want to ensure they are getting access to the best expertise. A growing trend is to engage a consultant to ‘introduce’ you to new business on a fixed fee or commission basis (or both). Agreements such as these require the consultant or introducer to refer a certain number or else spend a certain amount of time seeking out new clients. Once the introduction is made, the introducer usually has no further role in any contract between the company and the potential client and the introducers commission only becomes payable when the supplier enters into a contract with an introduced client. There are many variations when it comes to this kind of arrangement and it can be a good option to give your start-up a boost.
4. Intellectual Property
Another key issue is making sure you protect your intellectual property (IP). For example, when you decide on a name for your business it’s not just about whether the company name is available – you need to check no one has it registered as a trade mark and potentially register your own. You might want to protect your designs from competitors, or, if you engage the services of a developer to develop software for your new business, you’ll want to ensure that you retain ownership of that software. Think about all the IP that really means something to your business and find out how to protect it. The steps to do so are often inexpensive and straightforward, but not taking them can be a very costly mistake. You never know how valuable your IP really is until you lose it.
5. Terms and Conditions
Once your business begins trading, it is paramount to have in place a strong and bespoke set of terms and conditions to protect your business. Having clear trading terms is the best and most effective way to protect against future disagreements and problems with both customers and suppliers. As well as setting out the precise terms on which your company does business, you can exclude your company’s liability as far as possible and safeguard your cashflow by inserting strong payment terms. The importance and benefits of having carefully drafted and thought through terms and conditions in place for your business simply cannot be emphasised enough.
Most disputes with employees are caused by poorly-drafted employment contracts or dismissal procedures that don’t meet current legal requirements. Make sure your employment contracts, processes and record-keeping are up-to-speed. A good solicitor can provide a simple check to prevent these kinds of issues and help protect you from legal action. Employment disputes can cost your business financially and affect moral so don’t leave it to chance.
7. Investors and Funding
You might have an early investor for your start-up or you might be looking to raise finance in the future (or both!). Either way, think ahead about the possibility of giving up future equity in your company. Although you might want to attract early investment, future investors won’t like it if earlier investors have preferential rights to dividends or can exert significant control via a Shareholder or Investment Agreement. Remember that decisions you make now in relation to an early investment can have a knock-on effect on future funding rounds.
Getting things right from the start will pay dividends later on and help you to focus on what you do best – running your new business!
Elizabeth Comley, LawBite Corporate & Commercial Lawbrief.
If you have any questions for Lizzy about any of these 7 considerations or any other legal aspect of your business you can have a FREE consultation by submitting a request here or call us today on 020 7148 1066.