Business law: potential pitfalls for entrepreneurs

Entrepreneurs often lose sight of some of the more important laws governing business ownership – and this can prove incredibly costly

Business law: potential pitfalls for entrepreneurs

Starting a business is an exciting undertaking. There can’t be many things that get the juices flowing as much as the prospect of turning one’s big idea into a commercial success.

However, many entrepreneurs can lose sight of the important stuff amid their impatience and eagerness to get their venture off the ground. And if there’s one thing that often gets business owners tied up in the knots more than anything else, it’s the law. Suffice to say, the buzz of building a business from scratch can be obliterated if you’re found not to be doing things by the books.

Thankfully, we’ve enlisted the help of some tip-top legal minds to lay down the law on where entrepreneurs are most likely to trip up and how they can avoid some nasty headaches.

The right terms

Essentially, business is a series of transactions between a company, its suppliers and its customers. If there isn’t a clear set of terms and conditions governing each and every one of these transactions, a business risks being undone by the law – or lack of it. “Terms and conditions are boring. People do not read them. However, they are important,” says Nigel Jones, founder and owner of NVJ Legal. “If you have simple, clear agreements with your suppliers and your clients, when problems arise, they are solved with the minimum of fuss and without having to get lawyers involved.”

Making sure these terms and conditions are tailored to your company, as well as the country it operates in, is also essential. “Terms and conditions taken from a US company would not be governed by English law and therefore would not provide a company with adequate legal protection,” adds Jonathan Snade, corporate law partner at Thomas Eggar. “Further, an ‘off the shelf’ set of terms and conditions may not be suitable or tailored to your specific website, meaning users would not be told exactly what they can and cannot do, such as uploading inappropriate content.”  

Sharing the load

For businesses with more than one shareholder or multiple investors, laying down some ground rules at the start should help prevent any tricky situations occuring further down the line. “When entering into business with investors or shareholders, there should always be clear, written agreements set out that highlight each party’s rights and obligations,” says Stephen Attree, managing partner and head of corporate and business services of MLP Law.

Of course, this isn’t a concern for sole traders but when going into business with a friend or other associate, it pays to put personal relationships aside and agree on some terms, just in case. “As soon as you have a business partner, of whatever kind, it’s important to document some rules governing that relationship,” says Jonathan Oxley, director at Lupton Fawcett Denison Till.

“Key areas include what happens if one partner wants to leave. How much notice do they have to give? Can they set up in competition? Do they get paid for their share of the business and, if so, when? How is their share valued? The time to review these issues is at the start.”

Hot property

An entrepreneur’s worst nightmare is seeing another company rip off their idea before going on to make millions. When this does happen, it usually stems from a business owner’s failure to protect their intellectual property (IP). “One of the biggest mistakes that I see entrepreneurs make is failing to protect their idea,” says Attree. “The best way to combat this and ensure that an idea is protected is by putting in place non-disclosure and confidentiality agreements between any third parties that may be involved, such as freelancers. It is best to use a standard agreement that gives you the rights to all of the key and valuable IP such as your website, process and source code.”

A company’s name and trademarks are also tied up in its IP so it’s essential these are registered sooner rather than later. The first step is to check nobody else is using them already. “Registering a name with Companies House does not mean it doesn’t infringe a third party’s intellectual property rights,” says David Bloom, founder and director of SafeguardIP, the IP insurance broker. “A search of the trademark registry and a thorough search of the web is the minimum that needs to be done to ensure no other companies are using the name or anything similar.”

Failing to do this can result in a company having to undergo an expensive rebrand, explains Bloom, but there can also be serious legal consequences. “While it can seem like clever marketing to try and play off an existing brand with your name, you can fall foul of intellectual property infringement and this can be costly,” warns Katherine Niccol, solicitor at Slater and Gordon.

People issues

An employment tribunal is one thing an entrepreneur would rather avoid. Following proper HR procedures can go a long way to evading a legal battle with a disgruntled employee – and drawing up a solid employment contract is a good place to start. “If you’re taking on employees, make sure you give each one a proper contract of employment,” says Steve Roberts, partner at Richard Nelson. “It protects both them and you, whatever may arise during your working relationship.”

And with the government stepping up its efforts to punish companies paying below the minimum wage, entrepreneurs must be extra vigilant when taking on interns. “If the intention is for the interns not to acquire employment or worker status, it is important that their engagement reflects this in practice,” says Snade. “Accordingly, ensuring that they do not have fixed hours or significant roles in the business is key. Putting an intern agreement in place is also best practice to document the hopes and expectations in respect of the arrangement.” 

Adam Pescod
Adam Pescod

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