The first 100 days: Legal advice for small businesses

Here Andy Moseby discusses what to do to make sure you get your legal considerations right at the start of your small business journey.

There can be confusion array of legal advice out there

There can be confusion array of legal advice out there

There is a tremendous amount of legal advice issues for start-ups to consider in their first 100 days; from establishing a company and brand, to preparing to sell new products or services and employing staff to help the business succeed. Navigating a tangled web of legal considerations with limited or no legal experience, increases the risk that problems crop up in the future. It’s therefore crucial to get things right, or it may be costly.

At the beginning it’s advisable to limit your liability to protect your exposure to any personal financial risk. It’s achieved by establishing a separate legal personality to the founders; the most commonly used vehicle for start-ups is a private limited company. Head to Companies House and choose an available company name and register your company. You’ll need to adopt articles of association, which is the company’s internal ‘rule book’

Private limited companies need a least one person appointed as a director, and every director has certain duties imposed on them, which are owed to the company.

If there’s more than one founder, you should consider a shareholders’ agreement setting out the relationship between the shareholders and their respective rights and obligations. It should cover key matters, including the board composition and what happens if someone leaves.

Once your company is established, you may seek to raise additional equity from investors or provide financial incentives to key individuals in the company. One option is to issue shares, but before you do, you’ll need the approval of the board of directors. The directors will need to convene a board meeting and decide to issue the shares by a board resolution. Avoid falling foul of the law by filing forms relating to the share allotment, registering the new shareholders on the company’s register and issuing share certificates to them.

Using share options

However, rather than give away precious equity (shares can be difficult to get back if things go sour), you may decide to incentivise promising employees with share options. Employees receive a share of the growth in value of the company and have the choice to acquire shares in the future at an agreed price and subject to specified conditions.

Having established a company, founders should think about their intellectual property rights protection. Your first priority is to conduct online searches to find out what is already ‘taken’ by others in your chosen industry and key territories. Being mindful of what’s already out there will hopefully avoid disputes or the need to undertake an expensive re-brand further down the line. Bear in mind it’s not just identical marks you need to steer clear of; someone with a confusingly similar mark and operating in the same field, might be able to prevent you using your chosen brand.

Trade mark registrations are valuable monopolies and give the right to use a name or logo for specific products or services to the exclusion of others. This helps build brand identity, reputation and value. You should consider applying for a registration in your focus countries (eg the UK, or an EU-wide right). Simply registering a domain name for your chosen name is unlikely to give you rights that you can rely upon in contrast to a third party with a trade mark registration: the domain name being available is unfortunately not a reliable green light.

In addition to brands, certain new inventions can be protected by filing for patents. Like trade marks, patents are jurisdictional and enforceable in only those countries where you obtain a patent. They give you a 20-year-right to stop third parties carrying out the invention you describe. Unfortunately, patents are expensive to obtain (unlike trade marks) and difficult to get for software inventions (especially in Europe). Filing for a patent requires you to disclose your idea to the world, but it may be preferable to rely on keeping your invention secret.

Feeling ready to take your idea to market? Pause and don’t rush into opportunities. Before discussing opportunities with suppliers or customers, it’s advisable to consider a confidentiality agreement. It obligates both parties to keep discussions confidential; facilitating open dialogue in a safe environment to get the best outcome for both parties.

It’s important to draft terms and conditions to govern the sale of your product or the supply of your service. Terms and conditions should at the very least:

  • set clear rights and obligations for both parties, including how you will deliver the products or provide the services, and any payment obligations on the customer;
  • allocate liability for when things go wrong, and how and where the parties will resolve disputes (ideally in the English courts); and
  • cover provisions such as how the parties can terminate the contract (if perhaps the interests of the parties change), and what law will apply to your agreement (English law is a safe bet).

An important consideration and rising concern for companies is the requirement to keep customers’ personal data secure; if you are controlling or processing any personal data, you’ll need to comply with data protection legislation. Put simply, personal data is information that can identify a living individual (either on its own, or in combination with other information under, or likely to come under, your control), and ‘processing’ is defined very widely. An awareness of cyber security risks is important, especially if you’re developing a new product that might be exposed to a cyber attack.

Contractor rights vs employee rights

Need support to grow your business? Is a contractor providing discrete services, or an employee, right for you? A contractor (or freelancer) isn’t afforded the same employment rights as employees and can be attractive to businesses limiting their exposure to employment costs. Be mindful that HMRC will scrutinise the reality of these arrangements. If HMRC thinks your freelancer is actually your employee, you may be liable for certain employment costs (eg any unpaid income tax). Don’t forget that freelancers own the IP they create unless your contract provides otherwise.

Employers have greater control over employees, but must comply with a raft of obligations; from statutory leave and minimum rest breaks, to minimum pension contributions, wages and sick pay. Employees are entitled to a basic written ‘section 1 statement’ of their employment terms. While this may be appropriate for junior employees, it doesn’t provide more sophisticated protection around confidentiality, IP or post-termination competition. An employment contract is your opportunity to set more comprehensive boundaries and protections.

Employers must register as an employer with HMRC to deduct income tax and national insurance contributions through payroll. As an employer, you’re legally obliged to have in place employer’s liability insurance cover (for at least £5 million) and if you employ more than five people, a written health and safety policy. As you grow you will want to put in place policies dealing with other aspects of the employment relationship, eg equal opportunities, IT/communications use and family leave.

Finally, if you have identified a non-EEA national as being key to your business in the UK, then you should think carefully about how to employ them here legally. At all stages of the employment lifecycle, be mindful of your anti-discrimination obligations.

It’s clear that start-ups face a significant legal burden, which can seem overwhelming for first-time entrepreneurs. Founders often have limited resources to manage all that it takes to start a company, establish a brand and take their concept to market. Therefore, it’s no surprise that legal issues sometimes fall to the bottom of the list. If you are unsure where you stand, you should seek independent legal advice quickly.

Andy Moseby is corporate partner at Kemp Little

Further reading on legal advice

Comments (1)

charlesabraham

Interesting article. Readers may also be interested in the free legal library (including answers to many frequently asked legal questions on starting a business) which can be found at: www.lcf.co.uk/library/