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Five key legal considerations for start-up businesses

26th November, 2013

Choosing a structure for your start-up business

One of the first decisions for a start-up business is its structure. The business medium which is the most suitable is very subjective and will depend to some degree, on how many people will be involved in the business initially. For example if you are an individual, you could be either a sole trader or a limited company, whereas if there are 2 or more you could also form a partnership or a limited liability partnership.

Another factor is who would be responsible for the debts of the business. A sole trader or a partnership will be subject to unlimited liability (this is joint and several for a partnership) whereas liability can be limited to the capital contribution or amount of investment when forming a limited company or a limited liability partnership.

Once you have decided on structure, you will also want to consider the constitution of the business and a memorandum of association or articles of association will be needed for a company and a shareholders agreement or partnership agreement is advisable to regulate the conduct of the business as between its members.

Tax implications of your business structure

A further consideration which may affect your choice of business structure is what the tax implications of any given structure are. For example, a limited company’s profits are taxed through corporation tax and the distribution of profits to shareholders are taxed in the hands of the member receiving the dividend depending on what rate of tax the shareholder pays. By contrast, a sole trader, partner or member of an LLP will only be subject to income tax. You should consult an accountant for advice on the tax implications of different structures under consideration and we can, if you wish, recommend appropriate advisors in this regard.

Protecting the intellectual property in your business

Another key issue is making sure you protect your intellectual property (IP). For example, you may engage the services of a developer to create a website for your new business. You will want to ensure that you retain ownership of that website. This can be done through a website and design development agreement, which is something we can offer to new businesses.

You will also want to make sure that you are able to keep any IP created by your employees. Although if created in the course of employment it ought to belong to the employer, you would be wise to make this explicit to avoid uncertainty. For example, when IP is created by an employee outside the scope of their employment but done using your IP (e.g. a computer programme), or it is created during your time.

Some IP rights can be registered, for instance a trade mark, patent or design, and it is advisable to consider doing so. Even without a registered trade mark, you may be able to protect your mark under the common law right of “passing off” although it is best not to solely rely on this. If you have a trade mark or other right that you think might be registerable, we are happy to advise you.

Working for your start-up business

Many start-up businesses will not take on employees to begin with. However, once the business grows, you may look at taking on employees, or engaging the services of contractors, consultants or agency workers to assist with running the business. If you do so, you would be best advised to have legally compliant contracts and related policies in place so as to minimise the risk of disputes. You will also need to set up a payroll system for any employees. Our specialist employment team are able to advise on these aspects of your business.

Creation of terms and conditions for trading

Once your business begins trading, you will need to have in place a set of terms and conditions which are tailored to your business needs. During commercial transactions you may find that you are either the supplier or the customer. In each case, you will want the terms you are trading on to be the most favourable and to protect your rights. Key clauses that you will need to look out for relate to retention of title and the limitation and/or exclusion of liability. You should also be aware of “battle of the forms” which arises where each party attempts to contract on the basis of their own terms.

For further advice or information in respect of your start-up business please contact Nick Clarke, Partner in our Corporate/Commercial team on 01244 405558 or send an email to [email protected]

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