Bullet Proof Business: The Legal Fundamentals
Are you thinking of starting a new business or have a young business and don’t want to get tripped up by one of the many legal issues? If so, then this article by commercial partner James Peterson is a must read. It is proven that entrepreneurs who understand and engage with these legal fundaments are much more likely to come out on top in business.
Although you could create a never-ending list of legal issues to consider, from our experience of dealing with start-up businesses, there are certainly some legal issues which arise much more frequently than others. The most common legal issues we see businesses encounter are detailed below.
- Tax and insurance advice
It is critical to the long term growth of any business to instruct an accountant/tax advisor so as not to fall foul of HMRC and to structure the business in the most tax efficient manner. Taking this advice early can save you a fortune later down the line. Do also cover off the dooms day scenario by taking advice from an insurance expert, as it is not always what it seems!
- Have a crystal clear agreement/deal between co-founders
At the very outset, make sure everyone who is involved in the business is on the page and do not presume that you are thinking the same way. Discuss the big key structural decisions, including:
- Who will do what?
- Who will fund what?
- Who will get what?
- Who will make what decisions?
- What if one of you dies or is ill?
- What is the end game/vision for each of you?
Once you have agreed the core principals, getting this properly documented in a formal agreement and discussing other important areas you may want to include will save a lot of wasted pain, time and money going forward.
- Choose the right business vehicle
Depending on the type of business, the risks involved, the people involved, and the tax considerations, there are lots of different ways (‘business vehicles’) to set up a business. You can be a sole trader, a partnership, a limited liability partnership, or a limited company, to name just some. The short and long term implications of each are very different and it is something you should take advice on from your funders, your accountant, and your legal advisor at the outset to make sure you make the right decision. The formal agreement between the co –founders will also vary depending on the decision made here.
- Have a business plan
Although this seems obvious, many people don’t commit their short and long term objectives, methods and plans to paper (unless forced to by their funder!). However, a well drafted business plan (it does not have to be war and peace) will keep a structure to all key aspects of your business and allow you to accurately track its success. It should also flag up any ‘issues’ on the horizon so that you make plans to avoid them.
- Protect your intellectual property (IP)
In the past, this is something that was not a major consideration for most businesses. However, it is now a fundamental aspect of virtually all businesses (to different degrees). Making sure your IP, brand and business is protected by registering your IP rights (such as trademarks and patents) can prevent others ‘stealing’ your business after you have spent all the time and effort building it. It will also reduce the risk of you encroaching on someone else’s IP. The fact that lenders will often now insist that IP is protected, take it in to account when deciding whether to lend and will even take it as security for loans, shows just how important IP has become.
- Produce clear and standard terms and conditions
Having strong standard terms on which you deal with all of your key suppliers and customers will mean that you will know your rights and have clear legally enforceable contracts in place. This will ensure your rights are protected without the need to enter into long, protracted, and potentially costly negotiations on each occasion.
- Put robust financial controls and reporting procedures in place
Regularly produce and analyse income and expenditure against budgeted figures for the business. From the outset you must have clear defined credit control procedures in place which are rigorously enforced. Making sure you have your finger on the financial pulse at all times is critical, as one of the main reasons for businesses failing is cash flow troubles. Further, as you look to grow or exit your business, a clear historical and projected financial position will be a cornerstone for any investors. Finance is at the heart of any business and so if you get this wrong, all of your hard work in other areas may prove irrelevant.
- Have all employees/workers signed up in writing
As an employer you have certain legal obligations with which you must comply. Regardless of this, you should have detailed employment (or equivalent) agreements with all employees, workers, subcontractors, agents, etc. Having these in place can protect your IP and confidential information, make sure everyone understands their roles and remuneration, prevent them from working with competitors and allow you to terminate their contract if they are not performing. These are just some of the real benefits to you of having formal contracts in place.
- Keep on top of the ‘boring stuff’
Whichever type of business vehicle you choose, there will be various ‘admin and reporting‘ tasks (such as tax returns, companies house, and other filings) which most business owners see as a necessary evil and often get put to the bottom of the to do list. Whilst this may be understandable, keeping on top of this will save you a real headache and often there will be advisors that you can outsource this to if required.
James Peterson, partner