How to avoid these three expensive legal mistakes in your business
Starting or expanding your business is an exciting time, and it’s easy to focus on the fun bits. But make sure you don’t overlook the important stuff too, and avoid these three expensive legal mistakes.
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There’s so much you need to think about and work on when you’re launching or growing your own business. And it’s all-too easy to focus your energies on the things you enjoy doing or are good at – and ignore the rest, or assume it will just take care of itself.
But there are some aspects of running a business that, while they may be dull, are not just important, but essential if you want to avoid expensive problems later on.
Three expensive legal mistakes you need to avoid
Karen Holden, a working mum and owner of A City Law Firm, awarded Most Innovative Law Firm, London 2016, explains what these three mistakes are, and how you can avoid them.
1) Not getting the right advice at the right time
The biggest issue for many businesses is weighing up cash flow and getting the right advisors on board at an early stage.
Paying for a good lawyer and accountant often seems a lot when you first start out, but often they save you much more in the long run. When you are ready to invite in investment, expand or sell your business, their paperwork is absolutely the key to your success.
Choose those advisors carefully, though, because they must really understand you and your sector. If you need specialist advice make sure they really do have experience in these areas, and read their testimonials to make sure their approach suits you. You must lead your business – a lawyer or accountant must never seek to control how you operate, as their goals and outlook will always be different to yours.
Often we find the following mistakes have been made:
- Not making the plan for the business clear from the start between its co-founders (especially friends and family). Disputes then arise when third parties wish to be engaged or one founder wants to sell and the other doesn’t.
- Not starting the business as a limited entity. Being without this protection is a great risk to your personal assets.
- Not having reliable legal documents or client terms in your favour. As you grow these are increasingly more important and must be updated as your business changes.
- A lack of employment and contractual documentation in the early days could hamper your future. If you don’t have the confidentiality clauses or restrictive covenants your business is exposed.
- Not carefully considering intellectual property protection. The cost of registering trademarks and patents in the long run is far cheaper than trying to fight of infringement actions or re-branding if someone seeks to stop you using your own brand.
- Not understanding your finances and protecting cash flow. Often people secure contracts without real consideration on how they can perform the contract say for example when payment is an advance and the rest upon completion. Few clients have a clear cash flow statement that they update regularly to understand their monthly outgoings and cash projections so they become reactive rather than proactive. Understanding the tax advantages and reliefs out there available to you can be the difference between making it and closing up shop.
How can you avoid these mistakes or resolve these gaps?
It is never too late to resolve these issues. Here’s how you can do so.
Agree terms with your co-founders by way of a shareholder’s or partnership agreement. Key terms should cover:
- Roles and responsibilities for each founder.
- What happens if a founder leaves, retires is medically incapable of working.
- How will a sale, merge, investment acceptance of the business be decided.
- What happens if one founder is not living up to their expectations.
- How will a dispute between you be resolved.
Speak to an advisor
Ideally you’ll discuss how you set up the business with an advisor as early on as possible:
- If you are a sole trader, understand the risks and protect yourself and if you want to expand or take in investment you should discuss incorporating a limited entity as soon as possible.
- Make sure your legal documents, such as your articles or share allocation, is done correctly and reflects your accounts and true running of the company. You would be amazed at how many companies make errors here that takes some time to unravel and if you get the attention of HMRC this will delay your plans.
Get contracts written
Get a correctly crafted contract between you and your clients. This may sound obvious, but if you’ve used an inappropriate contract template, or your contract is out of date, it can cause tremendous problems as you expand. A good contract will at least contain:
- How your services or products are delivered.
- How disputes will be resolved.
- Representations and warrantees.
- Rights to cancellation, refunds and returns ,if products can be sold.
- Who owns the Intellectual Property Rights and how these are to be used.
- Payment terms and debt recovery terms.
2) Not carefully considering your intellectual property protection
If you have intellectual property, have you protected it? Here are some things you need to take into consideration.
A trademark includes your logo, company names or slogans.
Register all important trademarks so that you can deter others from using your brand and then if anyone does start using your branding without your permission this will give you the right to take legal action against them. You can also recover any losses suffered.
Third party assistance
If you’ve hired a person or company to create your IP and/or products, it is vital you have a detailed and protective agreement in place. This should assign full ownership rights to you upon payment or completion, as these do not automatically transfer to you. It should also cover what that third party should do upon completion such as destroying any workings, maintain confidentiality and importantly being unable to use the IP themselves unless permitted to do so.
Nondisclosure and confidentiality agreements
A lack of employment and contractual documentation can cause you significant harm if an employee leaves with confidential information, or third parties hold details of your IP. So, if you are going to disclose any details about your business, IP or development of IP including staff, sub-contractors, investors and other third parties, you should have well-drafted non-disclosure agreements in place.
All employees must have a statement of their employment terms within two months of employment and this sets the basic terms for clarity between you both. And make sure you have key documentation in place:
- Employment or consultancy contracts that specifically contain IP protection terms, restrictive covenants, warranties and confidentiality provisions. Secure adequate probation periods for you to trial new employees and make sure you vet them carefully.
- Non-disclosure agreements and non-compete restrictions are paramount.
- Disciplinary and grievance policies as you expand need to be bespoke to your company, and you may need to consider the need for a staff handbook. Statutory provisions may simply not suit your business.
3) Not protecting your finances and cash flow
It’s essential you protect your finances and cash flow. Things to watch out for include:
- Be careful when giving personal guarantee – these should be avoided if possible.
- Credit check your customers and keep an eye on their businesses, and make sure your payment terms are being met.
- Arrange suitable payment periods with suppliers and have clear, written agreements.
- Ensure you have a debt collection facility.
- Understand your cash flow on a monthly basis.
- Look at different financing options and investment options.
- Ensure that you understand all agreements that you enter into.
Getting this right from the start secures your business and your personal interests. The money you can save by getting your house in order and having the best possible tax and legal advice means you can develop without the usual risks effecting other businesses.
Karen Holden is the owner of the award-winning A City Law Firm, a solicitors firm that advises on start-up law, investments, company work in general and other areas including family and surrogacy.