Richard Coulthard, partner and head of corporate at Ison Harrison, examines some of the legal issues around starting a business
Starting a business is often an exciting time, but it’s also a time when new business owners are apprehensive about the future and the huge array of matters they need to consider when starting a business. They have to consider everything: from marketing, accounts and finance to legal matters such as contracts and employment.
For many this is a daunting process and it can be easy to look at ways to cut corners, or overlook matters, at least in the short term. It is a sad fact that the majority of businesses fail within the first two years. There are a number of reasons for this, but a common theme in business failure relates to a lack of planning or consideration of all of the issues, many of which new owners may be unaware when starting out.
The purpose of this article is to look at some of the legal issues around starting a business.
While it is preferable to seek expert legal advice on these matters, in some cases advice and template documents may be publicly available. Where you rely on template documents, it is imperative that you seek advice from a solicitor at the earliest possible opportunity as template documents rarely give you the full protection you need.
Decide on your legal structure
There are a number of ways to structure your business and considerations as to which structure is most suitable for you. Many people opt to form a limited company. The advantage of this is that the company directors and shareholders are not generally personally liable for any losses incurred by the company, although many financial institutions may insist on a personal guarantee from the directors against any bank borrowing and this may negate protection from the incorporation. Another advantage of incorporation is that it can enable shareholders to take a proportion of their income as dividends, which may be more tax efficient.
However, the downside of incorporating a limited company is that the accounts of the company will be publicly available and there are more stringent rules on how the business is to operate under the Companies Act 2006.
Some business owners opt to trade as a sole trader or partnership. This is generally suitable for smaller businesses that do not want to be tied to the more strict regulation around limited companies. However, as a sole trader or partnership, the owners are personally liable for all losses incurred by the business.
Document your relationship with co-owners
At the outset of a business relationship, business owners will often have multiple goals and aspirations. Unfortunately however, as time elapses it is not uncommon for business interests and goals to change.
It is absolutely imperative that the relationship between the owners is clearly documented at the outset. Important matters to deal with when starting a business include ensuring that there are appropriate restrictive covenants, dealing with what happens with shares in a business if one party wants to depart from the business, circumstances in which a business owner could be expelled from the partnership or as a shareholder, and what steps business owners can or cannot take without the consent of the other owners.
As businesses grow and decisions become more complex, these agreements can be varied as necessary, but failing to have these agreements in place at the outset can lead to disputes, costs and expenses later on. This is particularly pertinent in family-run businesses where there are the additional dynamics of complex personal relationships.
Draft appropriate terms of business
In many ways, ensuring that you have legally binding, enforceable terms of business is perhaps the most important document a new start-up can have. This governs how you will get paid and what happens if a customer does not pay on time. It also sets out the services or products you are to provide and can offer important protection to a business when things go wrong.
In some business relationships there are complex statutory or regulatory provisions that apply and failure to comply with these obligations can, in extreme cases, render your contract unenforceable. Wherever possible, you should take legal advice on this document.
Check your compliance requirements
Different businesses in different sectors will have different compliance requirements. It may be that you must be authorised by a regulatory body or you may require a licence to carry out all or part of your business. Failure to adhere to these obligations could lead to criminal sanctions.
There are also legal requirements that apply to all businesses. For example, all businesses must comply with the Data Protection Act 2018 and General Data Protection Regulation, and fines for non-compliance can be considerable. Businesses will also have obligations in respect of health and safety legislation to both employees and customers.
The need for written employment contracts
If a start-up has employees engaged in the business, then it is a legal requirement that they have a written employment contract. Failure to provide a written employment contract is in breach of the Employment Rights Act 1996 and can give rise to a compensatory award in an employment tribunal. Not only is it a legal requirement, it is good practice as it sets out key employment-related matters. It is also good practice to have an associated handbook detailing appropriate policies and procedures.
Where you engage self-employed sub-contractors, it is equally important to have suitable contracts in place to ensure that you are protected as a business.
Any new business start-up faces complex legal issues and it is essential that expert advice is taken at the earliest possible stage so as to avoid long-term complications, which could be more expensive to resolve.