Setting up your first business can be a daunting prospect. However, to help you cut through the red tape when embarking on a business venture of your own – and avoid some common legal mistakes – we explain some of the key issues entrepreneurs are likely to encounter when starting out.
- Legal structure
One of the first legal points to consider is identifying and setting up the most appropriate legal structure for your business. Typically, small businesses start life as a sole trader business or partnership before being formally incorporated as a limited liability company or limited liability partnership. Usually, the best option for your business will depend on what you are intending to do, and the most-tax efficient way to achieve your aims.
The structure you choose will affect various aspects of how your business is run, such as the type and amount of records and accounts that you will need to keep, and your personal liability if your business runs into financial difficulties. However, even if you intend to operate as a sole trader, it is important to ensure you are registered as such for income tax and national insurance purposes at H M Revenue & Customs. As a first port of call, discuss your circumstances and intentions with an accountant for advice on the most tax-efficient structure for you.
- Business names
Picking a name for your business is an important first task, but it can also be problematic from a legal perspective. It is important to ensure that your business’s name is not the same as any others (or confusingly similar), and that it does not infringe the registered or unregistered trade marks of any third parties. As well as checking trade mark registers, telephone directories, domain name registries, trade journals and trade magazines, there are a number of online resources, such as Companies House and the National Business Register where checks should also be performed. As this is a highly specialised area, it is recommended that you use a specialist solicitor to perform these checks.
Be aware, too, that use of certain sensitive words in a business name, such as “institution”, “national” and “society”, are restricted by law and it is an offence to register any of those words as part of a business name without the approval of the Secretary of State. It is also an offence to carry on business under a name using an indicators of legal status to which the business is not entitled, for example, using the word “Limited” at the end of your business name when your business has not been registered as a limited liability company.
Before making your choice, run your shortlist past your solicitor so any issues are identified as early as possible.
- The key legal agreements
Putting the right legal agreements in place to govern the arrangements between you and the other people involved in running your business, and ensuring that these are tailored to your needs, is essential to keeping your business running as smoothly as possible. The type of agreements that you need will, in part, depend on the legal structure you have selected for your business.
For instance, if you choose a limited liability company structure, a key document for your company will be its Memorandum and Articles of Association, which is essentially a ‘rulebook’ directing how the company operates that must be registered at Companies House (and made available for public inspection). However, you may prefer for certain arrangements between you and any other shareholders that have invested in your company to remain private, and a separate shareholders’ agreement that gives certain powers or rights to certain shareholders may be appropriate (for instance, the owner-manager may require weighted voting rights to ensure they cannot be voted off the board).
If, however, you decide a partnership structure is best for your business and co-investors, then a partnership agreement setting out the rules of how the partnership operates (for example, the share of profits each partner is entitled to) is vital to displace the provisions of the Partnership Act 1890 which would otherwise apply to such arrangements by default – and which may have some undesirable consequences.
- Terms of business
If your business will provide products or services to third parties, or purchase products or services from others, then it is fairly inevitable that you will be requested to enter into terms and conditions of business with those parties with whom you trade. If any of the terms in those contracts seem unusual or unduly onerous, then seek legal advice prior to signing.
Having your own sets of standard terms prepared, which you can then incorporate into your purchase and supply contracts wherever possible, will put your business in a more advantageous position and ensure it is dealing on the most favourable terms that it can.
You must also ensure that the terms of any contract you enter into are properly documented so that you have a record of your contractual obligations towards your customers and suppliers to refer to in the future. Similarly, if those third parties are not performing their own contractual obligations, ensuring that a copy of the contract is kept on your file will assist you and your advisors in identifying and enforcing the contractual rights available to you.
Broadly speaking, funding falls into two camps: debt finance, where your business borrows money from a third party via loans, mortgages, debentures or invoice discounting, and equity finance, where individuals or other companies invest in your company in return for a share in the ownership of the business.
The options available to you will depend on the circumstances of your business. For instance, in order for a bank to be willing to offer your business a loan, it may require you or your business to own assets of a certain value on which the loan may be secured.
Likewise, the options you decide to pursue will depend on the advantages of the type of financing for your business –debt finance, for example, allows you to retain ownership of your business, but repayments must normally be made on fixed dates which may cause problems if your business’s income stream is unpredictable. In many cases, businesses rely on a mixture of both debt and equity finance.
In all cases, you should carefully agree and document the terms of any financial agreement you make – even (or especially) if it is an informal loan from a relative or friend.
- Regulatory and compliance issues
The legislative obligations that may apply to your business will really depend on the activities your business undertakes. Some regulations, however, are likely to apply to many trading businesses, such as:
- Sale of Goods Act 1979: which requires you to sell goods of satisfactory quality, that are fit for their purpose and that are as you describe them.
- Sale of Goods and Supply of Services Act 1982: which requires you to perform the services you offer with reasonable care, skill, time and cost.
- Trade Descriptions Act 1972: which makes it a criminal offence to knowingly make false or misleading claims about the goods or services you offer, whether written or verbal.
- Data Protection Act 1998: imposes certain restrictions on the way personal data (such as records of the names of any individuals, including your customers) may be handled, and requires you to register with the Information Commissioner’s Office if you process any personal data (unless an exemption applies).
- Proceeds of Crime Act 2002: which creates the money laundering offences that make it a criminal offence to (amongst other things) conceal, disguise, convert or transfer any property that you know or suspect has been obtained from criminal conduct.
To help you get started, the government’s Business Link website provides information on the rules and regulations that apply to particular sectors. Alternatively, contact a local trade association or representative body for advice. The Trade Association Forum’s directory of UK trade associations is available here.
If you intend to engage contractors, staff or workers, in connection with your business then there will be certain legal obligations with which you must comply. Most importantly, the terms agreed between your business and any employee must be set out in a contract of employment along with certain other pieces of information, such as a job description and details of the place of work, as mandated by section 1 of the Employment Rights Act 1996. Again, the Business Link website covers the basics.
For help with more specific and/or complex regulatory issues, you should consult a solicitor.
If you decide to run your business from home, it is important to check your planning permission to ensure that you have the required consents to operate a business from your home address. If you need to apply for additional planning permission, contact your local authority.
However, if you decide to lease or purchase business premises, you will need to agree terms with your landlord or vendor, and ensure you understand the terms on which you intend to contract. There should be a formal agreement in place, and you should seek legal advice on negotiating and documenting the terms of your occupation.
- Intellectual property
Your intellectual property (often referred to as ‘IP’) comprises not only your business name, but also your confidential information (including know-how and trade secrets), trademarks, copyright, patents, goodwill (that is, the reputation and status attaching to your business, products and services), design rights, domain names… the list goes on. You will need to consider how your IP will be protected and who will own it. For example, you should be aware that IP commissioned by you or created by your employees or directors may not be automatically owned by you. You should take advice from a specialist solicitor on what IP rights you have, or are likely to acquire in the near future (such as IP in new products or know-how created by your employees) and how best to protect those rights.