Today, the barriers to launching a start-up are at their lowest. With open source technology and low-cost cloud-based tools, the cost of launching a start-up today is much lower than it used to be twenty years ago. No longer do start-ups need an office or long-term contracts to launch. The best talents can be accessed with a few clicks. Even entrepreneurs who do not have the technical skills to build a product, can now launch a product by using no-code tools which may be just enough to test their start-up ideas and to potentially build traction and attract investors.
With this in mind, beginning a business needs careful planning not only for sales and marketing, but also to crucially ensure the legitimacy of the enterprise, its dealings and to eliminate the legal risks for a seedling company. Most new business owners make the biggest mistake of not engaging with legal services which frequently results in the start-up being derailed before it commences operations.
Every aspect of running a business is governed by law. Entrepreneurs are lawfully required to know about all the regulations which affects their business.
LegalRoad has compiled a list of significant legal risks faced by start-ups today.
- Incorrect selection of the appropriate legal structure at the formation of the new business
The first most important decisions for a new business owner is to select the best appropriate legal model for the start-up. The legal business model chosen can have an impact on the funding options for the company, its tax responsibilities, and the personal liability of the owners. The appropriate business model can help to save tax, protect the personal assets of the owners, and encourage investment and funding.
- Absence of a Founders or shareholders agreement
Most start-ups are the combined efforts of more than one individual known as the founders. These creators are instrumental in the inception of the new business which can close before it has had the time to realise its potential when the founders have not clearly delineated each of their roles and responsibilities. A founder’s agreement brings the founders closer by clarifying the ownership and duties of each member within the organisation as well as agreeing how the equity will be dissolved when a member wishes to exit the business.
- Failure to protect intellectual property assets
A failure to protect a start-ups fundamental Intellectual Property (IP) assets can lead to grave financial repercussions and possible closure as the start-up lacks a categoric legal basis and financial funding to stop a potentially larger competitor from simply ‘adopting’ the start-up’s IP assets. The start-up simply has not incorporated any lawful shield to prevent such actions. From the outset the start-up must lawfully protect a unique product or idea with a patent and at the same time ensure the brand name, logo, etc. has been secured with trademarks. Copyright laws must also be adhered to secure the start-ups rights to original works of authorship for items such as software, advertising etc. Correctly obtained patents, trademarks, copyrights and authorship will help the start-up safeguard its valuable assets from unauthorised usage and protect its assets being commercially exploiting by competitors.
- Incorrect documents used for the sale of business shares
Start-up entrepreneurs sell their business shares to investors in return for funding. The sale of shares by a UK company to investors is guided by the Companies Act 2006. Using unlawful transfer documents to formalise such share sale agreements can lead to heavy financial penalties.
- Failure to have lawful business licenses
Every business act falls within the scope of legal regulations. Start-ups must know the licenses and permits they need before they commence to ensure they function within the lawful requirements of the territory they work in. Entrepreneurs may be vigil to ensure they contain risk for ever evolving regulatory and compliance environments while similarly ensuring the business objectives are achieve and budget restraints are strictly adhered.
Failure to do so can lead to regulatory non-compliance with follow on serious legal ramifications including heavy financial penalties and even business closure.
- Ignorance of applicable tax laws
Ignorance is not a defence to any breach of the law. Entrepreneurs must know about the tax laws applicable to the business model, the timings and various returns to be filed in the jurisdiction where the business is located, as well as the document filing to be maintained for tax purposes. Non-compliance of the relevant tax laws can lead to heavy financial fines and even business closure.
- Absence of employee agreements
UK businesses must navigate themselves through a maze of regulatory and compliance considerations when taking on employees. Start-ups are at a crucial development phase and cannot afford to be sloppy or careless over its employment policies, processes and agreements which set out the employee terms & conditions, duties and compensation, as well as the businesses policies on leave, employee benefits, healthcare, etc. A failure to maintain adequate employment documentation and follow regulations can lead to costly litigation claims, along with compensatory pay-outs and even the closure of the business.
- Data protection law
All contemporary UK start-ups invest in a website to promote its business. In so doing the business must ensure their website privacy policies protect all personal data as well as the fundamental rights and freedoms of persons related to that data, in accordance to UK legislation. Failure to do so may lead to costly litigation claims against the business and substantial financial penalties.