Legal Considerations for Start-up
By Rina Sond, Partner specialising in Company Commercial and Intellectual Property, and Thomas Knight, Company Commercial Solicitor.
Those involved in a start-up or early stage business may find it is easy to overlook or become overwhelmed by the legal aspects of their business.
However, staying on top of key legal points does not need to be complicated. Here are four simple points which you should think about if you are involved in a start-up or other early stage business:
- Choosing a structure
There are a number of different corporate structures that the business can take, including partnerships, sole traders or limited liability partnerships.
Limited liability companies (commonly known as limited companies) are the most common legal structure by far. The standard set up of a limited company is as follows:
a. The people that own the company are the shareholders. The majority shareholders have control over key decisions that the company can make. Shareholders who hold 75% or more of the voting shares in the company can, in general, make whatever decisions they want.
b. The people that run the company are the directors. The directors are responsible for day-to-day management of the company and as a result they owe the company several legal or fiduciary duties. For example, directors must always act in the best interests of the company.
c. In many start-ups and smaller companies, it is common for the people involved to be both shareholders and directors, in other words owner-managers.
There may be some tax benefits to choosing a particular corporate structure, so if you haven’t already, it may be sensible to consult an accountant or tax advisor at this point.
- Funding the business
If you are looking to raise funds for the business there are various options available to you.
If you have money readily available which you can invest into the company you may want to:
- Enter into a director’s loan – this is where a director of the company lends money to the company. The loan should be recorded in a formal written agreement.
- Issue new shares – a person can invest money into the company in return for more shares. However, be warned that this does change the shareholdings which may affect who has ultimate control over the company.
If you don’t have funds available to invest, you may want to consider external funding. You can approach your bank (or venture capitalists, private equity firms, or other investors) and ask for further funding. If your business is a limited company the lender will usually ask for security for the loan, this could include a legal charge over property; a debenture (a charge over the company); or a personal guarantee (from directors).
You should also speak to your accountant or tax adviser before finalising any funding arrangements as they will be able to advise you on the tax consequences.
Depending on your age, location and business type, you may be eligible for grants or funding from charities, the government or other initiatives. The government’s website contains a list of 165 schemes (at the time of writing) that may offer support and funding to businesses.
- Encouraging your clients to pay
You should think about your cashflow requirements and when it is that you need your clients to pay you – this can then be set out in the terms and conditions that your company uses to trade.
You may want your terms and conditions to expressly state that the time for payment is “of the essence”. This means that if your customer fails to pay on time you have the right to terminate the contract.
You may also want to include a default interest clause. This will say, for example, that the customer must pay interest at a rate of 4% per annum on any late payments. You must be careful not to set the default interest rate too high as this could make the clause unenforceable.
- Protecting your brand
What is it that you are selling to customers or clients? Can you protect it? In order to protect your assets and distinguish yourself from competitors, you may wish to think about registering any intellectual property rights that exist within your business. This could be registering a trade mark to protect a logo, filing a patent for an invention or ensuring documents and other materials are correctly labelled to assist with copyright protection. For more information, see our previous blog post on this subject here.
These are just a few considerations that you might want to think about, if you have recently started up a new business. If you would like to discuss limited companies, funding arrangements or commercial contracts in more detail, please contact our Company and Commercial team on 01992 300333.
Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.