Every business needs legal support. That being said, it’s understandable why so many small businesses never consult a lawyer. Legal advice can be complicated and expensive. More often than not, small businesses just don’t have the time or money. As a small business owner, you need to know exactly what your legal responsibilities are; from business structures, to protecting your intellectual property to understanding your finances.
Small Business Legal Advice Tip One: Your Business Name
Before even thinking about setting up a business, you need to think of a name. All great companies create a brand. Deciding on a business name is the first step to building a brand. Lots of small business owners are advised to use their own name or a name that indicates what the business does. For example, London Washing Facilities Ltd is a washing machine limited company. Having a name which is too long will be hard for customers to remember and for you to market in the long run. The name however, should be distinctive as this will make it much easier to obtain a trademark or service mark.
Your business name should help you create goodwill among your customers, employees and other businesses. Once you decide on the appropriate name, your name will become one of the most valuable assets of your business and make it easier to obtain investment in the future.
Some types of business names are explicitly forbidden:
Certain words are classed sensitive by Companies House and are thus prohibited for a number of reason (the full list can be found here). The banned words imply authority, association with a legal or government body or a regional relationship which may not exist. If you want to include one of these restricted names in your business name, you have to draft a letter of justification for the use of that name.
The business name must not be deemed abusive, offensive, inappropriate or misleading. Otherwise the name will be rejected. However, there are very few applications that get rejected on these grounds. If the name is accepted, but the public makes complaints, a Companies House judge will respond to these complaints and if need be, reject the name.
Your business name must also not be deemed the ‘same as’ another limited company on the register at Companies House. A business name is defined ‘as the same as’ when another name existing on the Company House registry is either identical or would be classed as essentially the same.
Small Business Legal Advice Tip Two: Choosing A Business Structure
Once you’ve come up with a business name that you believe will be accepted by Companies House, the next step is to think about the most effective business structure for your business. Surprisingly, recent research shows that a lack of legal advice for small businesses, specifically on choosing a business structure, has resulted in SMEs wasting £4.2 Billion per year.
What business structure will be commercially advantageous for your venture?
Sole Traders and Partnerships:
A British or foreign individual may carry out business by his/ herself or in a partnership with others (either an individual, business or both). A business owner may often wish to trade under a name which is separate from his/her name or the names of the individual partners. There is no longer a legal requirement to register a business name in the UK. As long as the correct legal name(s) of the owner or partners of the business, together with the business address for legal documents, are properly stated on notepaper, orders, invoices, receipts and on a notice of the premises where business is conducted.
When entering into a partnership, it is strongly advisable for a partnership to be established by a properly drafted Shareholders Agreement.
The Private Limited Company (LTD) by shares is the most common business structure in the UK and for good reason! The LTD business structure offers numerous advantages. It is relatively cheap and quick to incorporate, has a flexible structure and has relatively low annual costs. Private businesses are restricted from selling shares to the public. To do so, the business must be incorporated or re-registered as a public limited company. Less than 1% of companies on the the Company House register are public limited companies.
Even fewer still offer shares to the public. Often, the reason for incorporating a public company is simply for the additional status and credibility which this gives. In order to register as a PLC the business must have a minimum capital requirement of £50,000, of which at least £12,500 must be paid up. There is a minimum of two directors and there are a number of other company law restrictions which either apply only to public companies or apply to them more rigorously.
Small Business Legal Advice Tip Three: Getting A Shareholder Agreement
One of the leading causes of failure for startups and SMEs is internal conflicts with shareholders. You must have a formal document agreed to by all existing shareholders. This will prevent foreseeable issues between co-owners from arising and give the shareholders processes if an internal dispute does occur. A Shareholders Agreement will outline the business relationship between the shareholders, describe the shareholder rights, the extent of liabilities, and obligations of all parties in the business. When thinking about a shareholders agreement you should consider:
- Who are the shareholders going to be?
- What percentage of shares will be allocated to each shareholder and how much will you charge for an individual share?
- How much risk is assigned to each shareholder?
- Will any shareholders also be directors?
- Is there an exit strategy for any shareholders who may wish to leave?
- What will the dividend policy be?
- How will the dividends be distributed?
- How will conflicts of interest between shareholders and their other investments be resolved?
- What is the dispute resolution process?
- What are the voting rights of the shareholders?
- Will you have a deadlock procedure?
Small Business Legal Advice Tip Four: Protecting Your Intellectual Property And Preventing Infringement
One of the most valuable assets a business will have is its intellectual property (IP). Imagine Apple without their logo, Google without their unique search algorithm, Coca-Cola or KFC without their signature recipes. Too often, small businesses are so focused on turning a profit, that protecting their IP is at the bottom of their list. As a small business owner, you need to understand what you can copyright, patent, trademark, service mark or get the design rights to.
Obtaining a copyright automatically protects your work and prevents other individuals or businesses from using your ideas without permission. You can mark your work with the copyright symbol (©), your name and the year of creation just to make your copyright clear. However, whether you mark your original work or not, does not affect the level of protection you have. You’ll automatically get copyright protection when you create an original work, original artistic or literary work, original software or web content, original sound recordings, original film recordings or original broadcasts.
Copyright is important because it prevents people from:
- Copying your work
- Distributing copies of it, whether free of charge or for sale
- Renting or lending copies of your work
- Performing, showing or playing your work in public
- Making an adaptation of your work
- Putting it on the internet
Before applying to register a trademark, you should search the trademarks database to check if anyone already has an identical or similar trademark for the same or similar products or services. If you’ve found something similar or identical, you should ask the holder of the existing trademark for permission to register yours.
When you’ve registered your trademark, by putting the ® symbol next to your brand, it will be clear to others that you own the brand and it will warn them against using it. Generally, trademark law seeks to prevent confusion among consumers about who provides or is affiliated with a product or service.
Your trademark can include words, sounds, logos, colours or any combination of these. However, your trademark can’t:
- Be offensive
- Describe the goods or services it will relate to, e.g. the word fabric can’t be a trademark for a fabric distributor
- Be misleading
- Be too common and non-distinctive
- Look too similar to state symbols like flags or hallmarks
You could also use a patent to protect your invention. A patent will give you the right to take legal action against anyone who makes, uses, sells or imports without your permission. You can only be granted a patent if your invention:
1. Is new,
2. Involves an ‘inventive step’, and
3. Must be capable of industrial application.
Small Business Legal Advice Tip Five: Drafting Your Terms And Conditions
For many small business owners, getting terms and conditions drafted for you business may not be a priority. However, this tip is CRUCIAL to avoid future lawsuits. If you don’t believe us, then by all means, go full steam ahead and prepare to spend lots of money on legal expenses further down the line. If like us, you believe prevention is better than the cure, then pay careful attention.
Terms and conditions should outline:
- A simple and clear definition of what your business does and the products/services that will be provided to your customers
- A description of how you will process payment and when payment is due
- Any guarantees or warranties offered
- Delivery procedures and a returns policy, if applicable
- Terms of termination for the customer or business
- Which law shall govern the contract
Small Business Legal Advice Tip Six: Data Privacy
Nowadays, lots of small business owners have online businesses. If you own an online business you must abide by data protection regulations. If you hold and process information about your clients, employees or suppliers, you are legally obliged to protect that information. Under the Data Protection Act, you must:
- Keep user information secure
- Only collect information for a specific purpose
- Ensure your online security is relevant and up to date
- Delete the user information when you no longer have a need for it
- Allow the user to see the information if they request it
Small Business Legal Advice Tip Seven: Regulating Your Relationship With Employees
So your SME is doing well? It might be time to start taking on staff for the first time. Before you do so, you need to come to grips with all employment law. Contracts of employment are vital for any business as they regulate the relationship between both the employer and employee. Employment law encompasses dozens of different laws. It is advised to hire a specialist to not only discuss with you what contracts you will need but also inform you about the rights of prospective employees, including disability discrimination, senior employees rights, health and safety and contracts.
If you’re outsourcing work to freelancers, consultants or contractors you need the respective contracts. The rules and regulations are different from workers. Recent decisions by the UK courts have given contracted workers a number of rights including; at least the minimum wage, limits on working time and for their employer to adhere to health and safety regulations.
Small Business Legal Advice Eight: What To Do With Investment
SME’s need investment more than many other business. Small businesses that want to expand may want to develop a MVP, launch into a new market or expand a product/service offering. The common route to getting investment is to give away equity to an Angel Investor, Venture Capital Firm, or to take a loan from a bank. Whilst these options are attractive, each is not without their own pitfalls and obstacles.
To ensure that the investment goes smoothly, you’re going to need a specialist to draft the following:
Letter of Intent:
This is a non-binding document detailing a company’s intended action and the steps required to carry out or negotiate the investment. Obtaining and implementing investment is not only a complicated procedure, but the finalised investment can be just as complex. Letters of Intent aim to add clarity, making your life easier in the long run.
A term sheet serves as a blueprint for investment and is the product of negotiations between the investor and business until a binding agreement is made. Typically, a term sheet sets out the terms of the deal and reflects the due diligence. This pertains to issues such as the valuation, proposed levels of investment, equity and also any requirements for warranties from the business owners. If you think of the relationship between an investor and company as a marriage, the term sheet is the ideal document to agree on a mutually beneficial arrangement rather than putting on paper a more adversarial prenuptial agreement.
As soon as the investment has been agreed to, you need to draft either an Investment Agreement or a Shareholders Agreement. Each is an essential legal document in your startup’s arsenal. Both will help you regulate your relationship with your investor(s) once the investment has been made. It will address the specific rights of the investor(s), such as:
- Rights to appoint directors
- Elect board members
- To receive information on the business
- To veto certain actions of the company
- Share transfer restrictions
- Drag Along Rights
- Vesting provisions (if applicable)
- Contain warranties as to the company’s business
Need some information or need legal advice for your small business? Get in touch with us today!