Does the Law Matter? 5 Fundamentals when Starting a Business
By Daniel Walker, published: 2024-01-30
Starting a new business is an exciting prospect. Working for yourself, turning your ideas into reality, and (hopefully) earning sizeable profits have motivated many to take the entrepreneurial route and set out independently.
But, in the passionate rush it takes to launch a startup, you may need to pay attention to obvious legal issues that could derail an otherwise well-thought-out business plan.
Are you trying to figure out where to start? Here are five fundamental legal issues every startup or small business should consider.
1: Choose the proper form of business
When starting a new business, one of the first decisions is the type of business organisation you need.
Although there are a few options to choose from, often the choice is between using a sole proprietorship or limited partnership (where the legal identity of the business and the individual are the same) or setting up a private limited company (which can offer many flexible options in terms of structure ownership but is a distinct legal entity for liability purposes).
Make the correct choice
As a founder, you should consider the needs of your business carefully before deciding the structure that will work for you now and, more importantly, in the years to come, when you want to expand!
The industry you are entering may itself be an essential factor in deciding your business structure, but it also depends on several other factors, including:
- Cost of formation: Which will vary depending on the type of business organisation
- Tax responsibilities: Whether the organisation will pay tax on profits or any liability will flow through to the owners (such as in a sole proprietorship or a partnership).
- Liability: A sole proprietor and partners in a partnership can face personal liability while the sole shareholder of a private limited company, under normal circumstances, would not.
As with anything in life, choosing a legal structure requires trade-offs.
The simpler structures (sole proprietorship or partnership) are cheaper and easier to set up but less flexible in the long term.
Incorporating a private limited company is comparatively more complicated and expensive (but still relatively cheap). Still, if your startup becomes the next Instagram, you will be grateful for your foresight.
“The choice of business structure can determine success or failure as it affects many aspects of a business.”
2: Set up your organisation with an eye on the future
Starting a business with close friends or family members may appear to negate the need for formal arrangements.
However, individuals can disagree on a broad range of issues even without the challenges startups and businesses bring with them.
So, how do you protect yourself? A Shareholders’ Agreement (or a Partnership Agreement in the case of a business organisation set up as a partnership) is a legal contract between all the shareholders.
A robust Shareholders’ Agreement will flesh out key issues relating to the operation of the business and formalise your business relationship to prevent any unforeseen problems that will affect the success of your business.
For example, have you considered how the business will continue if one of the founders leaves the company? Would this particular founder retain his shares?
If not, does he have a right to offer these shares to the public, or should he offer them to the remaining founders first? How should these shares be valued and paid for?
While having a Shareholders’ Agreement may seem like you’re getting ahead of yourself during the initial startup stage (which may even mean working out of your home), it’s best to get this done before your business grows and things become more complicated.
3: Protect your intellectual property
Working hard at a business only for competitors to steal your product, idea, or brand is a nightmare for any entrepreneur.
To avoid this risk, all startups or small businesses should ensure they protect their intellectual property.
Protect your brand name
You may think registering your company name through incorporation will mean the name is protected. This is not the case.
A trade mark is the only way that you will be able to prevent another business from infringing on your brand.
Using a business name without registering it will give you some rights to that name, but if you want to sue someone for using the same or a similar name, you will only succeed if you can prove that you have built a reputation in the name and suffered actual damage as a result of the other person using it.
Proving this can be a challenging and expensive exercise in court. However, the good news is that you do not have to fulfil these requirements if you have a trade mark registration.
Before registering your trademark, you should conduct a trademark search to ensure that your mark or a similar one is not already registered in your jurisdiction. The last thing you want as a startup is to be on the receiving end of an infringement action!
Don’t discuss your idea carelessly
In the excitement of finding a great idea for your business, it’s natural to want to share it with family and friends.
Many startups are shaped by the support and invaluable advice of those close to the founders. But be careful! Once an idea is out there, it cannot be drawn back in.
The idea may be stolen and used by others and even find its way to your competitors. If you are looking for potential business partners, employees, consultants, or even interns, you should always ask them to sign a Non-Disclosure Agreement (NDA), under which they are legally bound not to disclose or discuss your idea or any other confidential information with a third party.
Be sure you own your intellectual property
As a startup or small business, you might engage the services of staff or third parties to create and develop your ideas.
For example, you might contract a graphic designer to design your logo or assign an employee to develop specific software for your online app.
Who owns the logo and the software?
If you commission a design agency to design a logo for you, they own the copyright in that logo unless there is an IP agreement stating the contrary. So, you must arrange for the copyright of that logo to be assigned to your business on completion.
You should also add a clause in any Consultancy Agreement to stipulate that you get complete and exclusive rights to the copyright. Similarly, you should ensure that any Employment Contract includes assigning all proprietary content to your business.
Don’t find yourself in a situation fighting over ownership and creation of any proprietary material.
Different types of intellectual property to protect
Trade marks: Words, designs, or phrases that serve as “the brand” for a product or service.
Patents: Ideas or concepts that are novel and non-obvious.
Copyrights: Creative expressions, such as prose, music, or video.
Trade secrets: Commercial information which is not disclosed to the public.
4: Hiring Staff
As an employer, you will have many legal obligations towards your employees. Unfortunately, many startups or small businesses overlook these and unnecessarily expose themselves to potential liabilities and penalties.
These liabilities may affect the company’s valuation in a sale or financing transaction, so it’s important to consider:
Employment contract: Sets the obligations and expectations of the company and the employee to minimise potential disputes.
Employment handbook: This may include obligations concerning:
- Employee rights and benefits
- Health and safety of employees
- Complying with various discrimination legislation
- Reporting employee remuneration for tax purposes
Mischaracterising employees and consultants
Employee benefits can account for a significant part of their total remuneration package. Because of this, many businesses choose to hire workers with the status of “independent contractors” or “consultants” rather than “employees”.
This is intended to save costs since many statutory benefits only apply to individuals who are classified as employees. However, if a dispute arises, it makes no difference what the parties have chosen to call themselves in a contract.
The law looks into the substance of the relationship to determine whether that individual is a genuine consultant or, in substance, an employee.
A company may face significant liabilities if it does not meet its obligations as an employer. Therefore, it is imperative to know the difference!
Common issues that startups usually overlook when hiring a new employee
- Specifics of any benefits
- Limitation of entitlements upon termination of employment
- Limitation on the employee’s ability to compete with the employer’s business once the employee leaves their employment
- Protection of the employer’s intellectual property, client lists, and other confidential information
- Ownership of the employee’s work product
An excellent way to ensure you are fully covered is to use a Zegal template—all of which are created by qualified lawyers and regularly updated to stay ahead of changing regulations.
5: Other agreements you may need in the course of your business
Documents play an essential role in protecting the interests of the business and the business owners throughout a company’s lifetime.
Here are five more legal documents startups and small businesses use. Your startup may need several documents depending on the type of business and the products or services you offer.
- SAFE Agreement Template
- SaaS Agreement Template
- Freelance Agreement Template
- Share Vesting Agreement Template
Tackling your legal needs can seem daunting, but it doesn’t have to be. Zegal makes light work of any legal contract: The template builder will ask a few questions and automatically create the legally binding document. No legal knowledge is required, and you can create one in minutes.
How legal documents become legally binding
Once you have created your document, all parties must sign it for it to be legally binding.
A signature on a legal document is evidence of one’s intention to enter into the terms laid out in the document. In 1998, Singapore became one of the first countries to allow the signing of legal documents online. Hong Kong soon followed.
Now, e-signatures hold the same weight and validity as a hard copy signature everywhere but without the paper, transport, and time.
Why use e-signatures?
- Alternative to pen and paper
- Send and sign anywhere in the world
- Legally binding
- Save time
- Save postage costs
- Added convenience
- Cloud storage
After creating a contract with Zegal, you can send the document to the e-signers with a click of a button. Or download the template if you want to go old school and have them sign it with an actual pen!