Ask the expert: what legal issues should I know about when I start my business?
Sally Hyslop, a solicitor at law firm Ward Hadaway, talks through some of the legal issues that entrepreneurs might face when starting up a new business.
Can you outline the different business structures that are available when starting a new business?
The first option is to trade as a sole trader. This is relatively quick and straightforward to set up and you can start trading straight away. However, the downside is that you have unlimited liability as an individual for any claims that might arise against your business. Raising capital can also be more difficult as a sole trader.
If two or more people form a business together, another option is to trade as a partnership. Your business would be governed by a partnership agreement which lays out each person’s responsibilities, liability and the governance structure. Liability for claims still rests with the partners as individuals. Both partnerships and sole traders are exempt from publishing their accounts on Companies House, so choosing either of these options also gives an element of privacy.
A third option is to trade as a limited company. In this case, the business is governed by a board of directors and their individual liability is reduced by the presence of a corporate structure. Limited companies are governed by the Companies Act 2006 which means they have to adhere to the rules laid out in the Act and publish accounts publicly. Limited companies are often more attractive to investors and can also find that they have better eligibility for sources of funding and investment.
So how does an entrepreneur decide which structure is right for their business? There are several things you should consider, including risk: what level of risk and liability do you want to accept as an individual? You should also think about your business plan, possible funding or investors, and how much you think your business will grow in the future.
What other examples are there of legal requirements that people are likely to encounter in the early days of starting a business?
You can start a business fairly easily without addressing legal issues as a pre-requisite but it’s important to think ahead and protect yourself from problems that you could face down the line. Before you start, think about what laws and regulations apply to your sector. For example, if you plan to collect any data from your customers then you will need to think about data protection regulations.
For many businesses, having terms and conditions of trading in place can protect you from problems and, likewise, when you’re purchasing anything from a supplier, you must make sure that you read their terms and conditions thoroughly and understand what you’re agreeing to – are you signing up to a subscription that renews every year, for example?
Another area that often gets overlooked is intellectual property (IP). If you have an idea for a new product, think about whether you need to formally protect your IP through patents, designs, copyright or trademarks and remember that, once you’ve disclosed your idea to others, this can prevent you getting a patent. You need to think about protection before you launch as it can be much more difficult to protect your ideas later on.
IP also applies to service businesses - for example, if you pay a supplier to create a website or a brand for you, you will need to be clear on whether the IP for the content has transferred to you once the job has been completed. This is another example where checking the supplier’s terms and conditions is vital.
In your experience, where do startups most often run into problems when it comes to legal matters?
It often comes down to not having things in writing, and relying on verbal agreements or vague email discussions. Having an informal agreement can make things much more difficult to resolve if there is a dispute later on and that’s why you should always make sure you have a paper trail. This doesn’t have to be something that’s written up by a lawyer; even having minutes, copies of correspondence and emails can be helpful, as long as they clearly record the key points of the agreement.
An example of this would be having shareholders' agreements or partnership agreements in writing right from the start. Don’t just rely on discussions and conversations as it can be very costly to resolve disputes that might arise when the business has grown.
The key is to try and get your house in order formally from the beginning to avoid any misunderstandings or disputes either internally or with third parties, and again, getting any necessary IP protection in place from the start.
How has the COVID-19 pandemic affected Ward Hadaway’s work with startups and new businesses?
We’ve heard from lots of businesses that are either diversifying in response to the pandemic, or that are starting up based on new ideas and innovation. People are looking at how they can do things differently and how they can help to solve problems, really pushing their levels of innovation, which has been great to see.
We’ve also helped businesses and startups to access the financial assistance that’s on offer now, such as help with legal fees for startups.
Ward Hadaway works with the Business and IP Centre of the British Library to offer free consultations with startups about their IP protection and we have published a COVID Hub on our website which contains guidance on the legal issues that businesses might face as they start getting back to business.