A legal guide to starting a business
If you are already a business owner or if you are considering starting your own business, you may have read dozens of articles about how to prepare for the entrepreneurial journey. They possibly told you a couple – or quite a few – steps you need to take to successfully start your new business. Regardless of the number of recommended steps, dealing with legal issues is always on the list.
What are these legal issues and how can a small business deal with them? That’s what we will explain in this article.
Table of contents
- Setting up your business plan
- Protecting your business idea
- Choosing the right business structure
- Funding your business
- Who you will work with
- Privacy and Data Protection
- Licences and Permits
- Where to go for additional help
- Wrapping up
Setting up your business plan
If you want to start your own business, setting up a business plan is one of the first things you need to do.
Your business plan will set out the scope of your business, the targets you want to achieve and how you plan to get there.
When you prepare your business plan, you should consider:
- Your products and services
- Your potential customers
- Your business model (for example: subscription, made to order and off the shelf)
- The suppliers you need to develop and deliver your products and services
- The money you will need and how you will get it
- The people you will work with
Your decisions on each of these points will define the legalities you will need to start, run and grow your business. The more solid your business plan is, the easier it will be to understand the legal documents you will need.
Top Tip: A solid business plan is the key to achieving your business goals. Learn how to get started and what you need to include in our complete step by step guide to writing a business plan 🖋
On the other hand, as you travel through your entrepreneurial journey, business plans will change and mature over time. Whenever this happens, it is important to record such changes and assess how they will affect your legal documents. Different products, services and business models quite often require different legal structures.
Therefore, if you are not sure about the business structure you want to use for your start-up or how a change of plans may impact on your legals, you may consider engaging a lawyer in the very early stages of your venture and whenever there is a change of plans so that you can work together on all the points that should be addressed.
Protecting your business idea
Putting your ideas into a business plan does not mean that your ideas are protected. There is more you should do if you want to keep the ideas you have for your business safe.
Throughout your life as an entrepreneur, you will talk to many people. Investors, clients, suppliers, advisors and all sorts of business partners. If you share with them any information that you believe should not be told to anyone else without your consent, you should consider signing a non-disclosure and confidentiality agreement with them before you disclose any such information.
A non-disclosure and confidentiality agreement – usually called NDA – will set out that a party that receives confidential information from another party shall not disclose this information to anyone without the consent of the party that disclosed the information – except for limited exceptions.
An NDA may also provide that the confidential information may only be used for the purposes for which it was disclosed and nothing else. They are also particularly important because mere ideas are not entitled to legal protection as intellectual property.
After your idea is recorded or fixed on a physical means (including digital means), you need to think of ways to protect this idea and the Intellectual Property associated with it. Otherwise, other businesses may end up using your idea before you do.
To protect your name and logo, you may consider registering a trademark. Depending on the type of invention involved in your business, a patent may be a good option to protect intellectual property rights related to the invention. Moreover, copyrights are important to protect expressions of ideas after they are recorded or fixed.
Whenever you or your company (if you are trading as a limited company) enter into a contract with suppliers, clients, investors, shareholders and contractors of any kind, it is essential that these contracts include clauses that clarify what intellectual property will be developed, who will own it and what each party will be able to do with such intellectual property rights.
If you want to learn more about intellectual property and how it affects your business, our partner LawBite has created an ebook on Intellectual Property. The good news? You can download it for free.
Choosing the right business structure
In England, there are three business structures SMEs may set up to run their businesses.
An entrepreneur can be a sole trader, which means operating and running their business on their own. This is the most basic business structure as there is no distinction between the entrepreneur and the business and it does not involve many formalities. If something goes wrong with the business, the business owner will be personally liable for them. This means that the entrepreneur’s personal assets – like their car, house and money at the bank – may be used to pay for debts related to the business.
That’s why many entrepreneurs choose to incorporate a limited company. If you incorporate a limited company and conduct the business through it, the debts of the business will, in principle, remain with the company. It is also often easier to raise money to grow your business if you operate under a limited company. There are some legal and accounting formalities that you need to follow – in particular with regards to corporate and financial records that need to be kept and filed in Companies House. However, the benefit of the limited liability attracts several entrepreneurs to this particular business structure.
Top Tip: Not sure which structure is best for your business? Learn more about what you should consider before you choose in our guide to limited company vs sole trader company structures 🏢
If your business involves the supply of professional services – like accounting, legal services or consultancy – a limited liability partnership (LLP) is another option of business structure. The rules that apply to the management of the LLP tend to be more flexible than the rules that apply to limited companies. Bear in mind that you cannot incorporate an LLP with only one member and that the revenue the members get from the business may be treated as personal income and be treated accordingly for tax purposes. It is also important to be aware that all of the owners of an LLP have limited personal liability for business debts.
Funding your business
After you choose the most suitable structure for your business, you should consider how it will be funded. Hopefully the revenues you will get from your clients will soon be enough to pay all the bills and generate profits, but until you reach this stage, other sources of funding may be necessary.
Many entrepreneurs start a business using their own savings – and it is absolutely fine if you take this route. It is your skin in the game. If you choose to put your own money into your business, it is very important – in particular for tax purposes – that you properly register this investment in the business accounts. You may consider talking to an accountant or business advisor to discuss the most tax efficient way to formalise your cash investment.
Very often, family and friends play an important role in an entrepreneur’s life. They share their own savings to fund new ventures of entrepreneurs within their families and circle of friends. However, business is business. Therefore, establishing from the outset the basis of this help is crucial.
Is the entrepreneur expected to repay the money invested? If yes, when? If the money is paid in exchange for shares in the company, have the friends and members of the family been made aware of the risk of this type of investment?
There is also the investment market for startups. You may find that angel investors and other types of investor are interested in investing in a business like yours. They usually have their own requirements before investing. They may investigate all sorts of aspects of the business under a due diligence process and provide their own documents for your review.
Contracts with investors must be read carefully because they may have lots of pitfalls that substantially impact your position as a founder and your decision making power in relation to the business. Concessions are part of the game – but you need to fully understand what you are letting go of and what you are getting in exchange.
Last but not least, you may get loans from banks and other financial institutions. These entities usually require you to adhere to their terms and conditions. This does not mean that you should sign before you read. On the contrary, you should review any documentation you receive carefully so that you know what you can and cannot do in order to avoid doing anything that may put you and your business at risk.
Top Tip: If you are considering how best to fund your startup, you can learn all about the different options available to you in our guide on 10 ways to fund your small business 💸
Who you will work with
To start and grow a business, entrepreneurs need to engage with lots of people. For any such engagement it is important that you have a contract in place. If you don’t have written contracts to set out the rules that apply to those engagements, it will be quite difficult to resolve disputes if anything goes wrong between you and the other party.
The key stakeholders that all business owners will deal with in one way or another and with whom you should enter into contracts are:
These are the people that will start the business with you so it is very important that you agree who will contribute with what for the business. It can be money, intellectual property or time and effort – all resources are valuable and should be taken into account in the structure of the business.
If you are setting up a business with co-founders, you may consider a shareholders agreement to deal with the management of the company and how decisions are made.
If the co-founders are expected to work for the company, a service or employment agreement between the company and the co-founder should be put in place. Being a shareholder does not mean that you are obliged to perform any particular task or achieve any specific milestone. This should be agreed separately and ideally in writing.
As the owner of an SME you will occasionally need to rely on investors for financing to help you launch and grow your business. Investors can be friends and family members or financial institutions. In all cases, you will need to set out what they will get for their investment – not only in terms of shares but also in participation in the decision making process of the business.
Suppliers include anyone who provides goods or services that you need to deliver as part of the offer to your clients. It goes without saying that you need to ensure that they will be able to deliver everything you hire them to do. Contracts will help you to enforce these expectations.
Contracts with suppliers should impact what you offer to your clients. You should not offer them something that you cannot get from your suppliers. As it is usually said, the contracts should be “back to back”.
Some suppliers trade under their terms and conditions. Whenever this happens, you should review these terms and conditions carefully and ensure they reflect what you have agreed with the supplier making sure you can comply with them. Even online terms and conditions deserve your attention if those services or goods are essential to your business.
If you have questions, you may consider obtaining legal advice to understand what that provision means and contacting the supplier to clarify their terms and conditions. Otherwise, you may end up breaching the contract with the supplier.
Members of Staff
Whether you engage employees or freelancers to help you in the operation of your business, it is essential that you have the right arrangements with them and that you understand what you can and cannot do under such arrangements.
One of the key clauses in agreements with members of your staff is the definition of the scope of work. Disputes usually arise when the parties have not formally agreed with what exactly they should do and when. The scope of work shall be as complete and clear as possible. You should allow some time to think through the tasks you want your members of staff to deliver and add them to the contracts.
If you hire freelancers or self-employed contractors, but treat them as employees of your business, you should be aware that they may be considered employees even if they are engaged under a service or consultancy agreement. The more interference you have in when and how they deliver their services, the higher the risk is of their engagement being qualified as employment.
IR35 is another controversial topic if you engage freelancers or self-employed contractors. If you provide goods or services to bigger clients, they may ask you to provide information about the freelancers you engage and be required to report to HMRC if they believe that they should be employees.
The jewels of the crown, the end goal of your business. All entrepreneurs want to please their clients. To achieve that, clear rules on how the services and goods are supplied are essential. That’s what terms and conditions are meant to do – telling your clients how you do business.
When you engage with your clients, you are the supplier. Therefore, everything that was explained above about the importance of setting a clear scope of work applies here. You don’t want your clients to say that you should have done something that you never agreed to do.
If your clients are consumers, extra care is required in relation to how you present your goods and services to them. Clarity and transparency are key. Consumers must always be well informed about what they are buying.
Privacy and Data Protection
One of the most important topics these days. If your business deals with personal data, you must comply with data protection legislation.
Personal data is any information that can be used to identify an individual – who is called a “data subject”.
Data subjects have the right to know what you are doing with their data and you should make sure that you don’t use their personal data for any other purpose than the purposes for which you have the right to use it.
Licences and Permits
Last but not least, your business needs to comply with the laws and regulations that apply to your type of business and obtain any licence or permit required by such laws and regulations.
Laws and regulations tend to vary depending on the sector. Researching them thoroughly is essential to the lawful operation of your business.
Now that you know more about the key legal issues you must take into account when starting a business, you may want to go deeper into those that are critical for your startup.
Where to go for additional help
If you are starting a business for the first time, it is vital to take legal advice so that you can ensure you are protecting your business from the start.
Tide has teamed up with LawBite, the leading online legal platform, to provide easier access to expert help that is fast and affordable.
Tide members get a free 15-minute consultation from one of the friendly lawyers at LawBite, and also receive extra discounts (10% for Tide Members and 20% for Tide Plus members) on any commercial or corporate legal advice your business needs from LawBite.
Deciding to start your own business is an exciting time, but can also be a daunting process if you have never done it before.
To ensure you are protecting your business from the start, make sure you are:
- Defining your business plan, including your scope, targets and how you will achieve them
- Protecting your business idea and your intellectual property rights
- Choosing the right business structure for your start-up to run your business
- Considering different sources of funding available
- Negotiating the right contracts with your different stakeholders
- Complying with GDPR and the laws and regulations that apply to your sector
As detailed in this guide, it is important to deal with the legal issues in the right way from the start in order to avoid big problems in the future. It is vital to partner with an experienced Commercial Solicitor who can provide you with the expert legal advice you need.
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