Start-Up Legals: Agreements you must have, agreements you can put on hold, and why legislation from 1890 might be required to settle a business dispute.
So, you have decided to start your own business! A very exciting time, with endless possibilities and, the risk of getting caught up in launch euphoria and forgetting to put in place basic legal agreements to safeguard your interests in the future.
The key at this stage is to understand what you should have as a minimum and what can be put on hold….
One of the first things to agree upon is the type of business entity you wish to trade from.
Sole Trader, Partnership Or Company?
Some types of business are more onerous than others and there are different legal, administrative and tax implications for each so it’s best to take advice early on.
For companies, it’s good practice to first consider whether you need special terms to suit the circumstances of your business. You can deal with these in your company’s articles of association or a shareholders’ agreement. Whilst there is no legal requirement to have a shareholders’ agreement, it is pretty crucial if you are planning on more than one shareholder, even if that other shareholder is family, friend or blood brother.
A carefully drafted shareholders’ agreement ensures that you formalise key strategic issues in your business. Areas worthy of mention include additional funding strategies if you need more money down the line and what will happen if someone wishes to leave the company – this latter issue is really important and has been the cause of serious friction between previously good friends.
For partnerships, consider whether you will trade under the names of the partners, or use a separate business name. You’ll need to advise HMRC and then look at entering into a partnership agreement.
Failing to prepare a partnership agreement can be disastrous; the parties will have to rely on the Partnership Act 1890 (yes that’s right, 1890… Queen Victoria and all that!) which provides that the partners are entitled to share equally in the capital and profits of the business, regardless of how much time or capital each has actually put into the business. Under the Act, a partner can withdraw from the partnership and this could lead to business closure if the partner insists on the return of their capital.
A partnership agreement looks at how the business is to be financed, how profits are to be divided, how decisions are to be made (and what to do if you fall out!) and what happens if a partner wishes to leave the partnership.
The agreement is also a prime opportunity to agree on broader issues, such as your business strategy. You should also agree on issues like holiday entitlements, whether you will employ members of your families – seemingly trivial at the outset but common cause of attrition if not organised at the outset.
Many partnerships structure their businesses under the limited liability framework since it offers the benefits of a traditional partnership (including taxation) but with limited liability.
The process is more complicated (LLPs are registered at Companies House and annual accounts are required) but this option is particular popular with professional businesses such as solicitors and accountants, etc.
Standard Form Contracts:
A standard form contract is another legal agreement to consider at the outset. The contract should succinctly deal with issues such as pricing, payment dates and penalties which will be incurred if payment isn’t made on time. You’ll need to deal with limitations on your liability, breach of contract and how to deal with disputes.
Start-ups often fail to create adequate employment documentation from the outset. Take on staff and you’ll need internal policies and procedures. You will also need to register for PAYE and organise employers’ liability insurance.
Intellectual Property Rights:
Definitely need to consider IP rights. Do you have a business or brand name that you can protect as a trade mark? Are there any designs or inventions that you can protect via registration? Prevention is definitely better than cure.
Need Help With Your Startup Legals?
Get in touch with Linkilaw by booking a free Startup Legal Session and we can help best advise what legal documents you need specific to your unique circumstances.