Wanna Be Startin’ Something? – Legal Considerations For Business Start-ups

To say that 2020 has shaken things up a bit would be an understatement, with the current worldwide impact of the Covid-19 pandemic on our health (both physical and mental) and economic wellbeing is plain for all to see. It is still too early to know what the long-term implications of all this will be, but it is already clear that less time spent in the office has given many people an unexpected opportunity to reflect on their working arrangements. This will inevitably lead to some deciding to take the plunge and start their own businesses.

There are many reasons why someone might decide to establish a new business: some will have long-held ideas they’ve always wanted to pursue, some will want to create a new organisation which is more aligned to their personal values and some will simply want more control over their working lives. However, regardless of motivation, there are a number of practical steps that every founder of a new business should take in order to maximise their chances of success. Creating a business plan and securing access to funding are fairly obvious points, but there are also a number of legal considerations that it is sensible to address.

Choice of business vehicle

Most businesses are sole traders, partnerships, or limited companies. Sole traders and partnerships require no particular legal formalities to set up, which makes them a tempting choice but expose the owners to potentially unlimited personal liability for the debts of the business. By contrast, a limited company’s finances are separate from those of its shareholders and directors but, in addition to the (relatively straightforward) process of incorporation, there will be ongoing reporting and management responsibilities. It is important to understand these differences and make sure that the right trading entity is chosen.

Constitution

Anyone starting a new business with one or more other people would be well advised to consider documenting how this relationship is intended to work. Although (for partnerships) the Partnership Act 1898 sets out a default set of rules and limited companies are normally incorporated with standard-form articles of association, it is unlikely that these will operate in the way the parties intend.

To avoid unpleasant surprises in the future (for example, a partner leaving a business causing the partnership to be automatically dissolved, which would be the case without a partnership agreement), it is strongly advised that legal advice is taken, that all parties agree on how potential issues will be dealt with and that they properly document this.

Intellectual property

A new business will, almost inevitably, have a website (and associated domain name), a trading name, and a logo. Depending on the nature of the business, registered trademarks, patents, and copyright may also be relevant. Much of this intellectual property is often created or registered by one or more founders of a new business and it is important to make sure that legal and beneficial ownership ultimately ends up in the name of the business, for the benefit of all owners.

It is also worth bearing in mind that established businesses will often aggressively police their own intellectual property rights. Start-ups that inadvertently infringe pre-existing third-party rights can therefore end up in messy and expensive disputes with the owners. A little time spent taking legal advice on how best to avoid these pitfalls is a wise investment.

Terms and conditions of sale and supply

In the excitement of starting a new business, and making the first sales to customers, it is all too easy to accept whatever trading terms are offered. This will often happen without anyone even realising it. If a customer’s order has their standard terms and conditions printed on the back, the chances are you will end up bound by these terms (whether you have read them or not). The same is often true for orders placed with suppliers.

In many cases, businesses can trade for years without paying any attention to the terms and conditions which govern these relationships. However, one immediate consequence of the Covid-19 pandemic was a large number of businesses discovering that they weren’t able to enforce payment from their customers in the way they thought, which was in some cases compounded by creditors having the right to take aggressive action to enforce payment of their own trade debts. It is fundamental to the success of a new business to get a bespoke set of terms and conditions drawn up which meet its needs.

It is also worth bearing in mind that sales made by telephone and using online platforms are subject to specific rules and regulations which will need to be understood from the outset.

Property

Very few businesses are completely ‘virtual’ and so start-ups are likely to need premises to trade from, even if this is just a small office. Given that commercial leases are often long-term commitments that create significant liabilities (for example, personal guarantees of rent payments and obligations to fully reinstate the premises at the end of the lease), it is always advisable to take professional advice on these commitments before you sign on the dotted line.

Employees and other workers

Any business which takes on employees is legally obliged to provide them with (as a minimum) a written statement of the key terms of employment. However, a more comprehensive employment contract is strongly advisable to ensure that both the employer’s and employee’s rights and obligations are fully documented from the outset. No-one wants to discover the hard way that a key employee is free to leave on minimal notice, immediately set up a competing business, and start poaching key customers or clients.

Engaging the services of others outside of an employment relationship is also an area where advice should be taken at the outset. For example, many businesses engage the services of an agent as a way to grow their business in a new geographical area. However, without properly documenting these relationships at the outset, the principal can be liable to pay substantial compensation to the agent should they ever decide to bring the relationship to an end.

Clearly, at the start of a new business venture, any responsible founder will want to avoid unnecessary expenditure, and this can often result in a decision to deal with some or all of these points at a later date. (All too often, they end up not being dealt with until it is too late, with avoidable and potentially serious problems having already arisen.) However, the most reliable route to success is not to make decisions and prioritise actions in your present best interests, but in the best interests of your future self. If you’re building a business to last, you need to start with the foundations.

Although it is now almost 18 years since BHW was established as a new start-up business (around the managing partner’s dining room table!), we’ve never forgotten our roots. Our Corporate and Commercial Team has been providing advice to other new businesses ever since, drawing on both our legal expertise and our own experience of founding and growing a business. For advice and guidance on starting a business, call 0116 289 7000 or email stephen.mcelhone@bhwsolicitors.com.