Setting up a new business is an exciting time. However, few business owners have legal training, and it is remarkably easy to walk straight into a legal pitfall in the early days of your business, completely unaware of the risk that you are creating. In this article, we consider how you can avoid the 7 worst legal missteps when setting up a business.
1. If you are starting a business together with anyone else, it is essential to have a clear and detailed agreement as to what this entails. Each party must have a clear understanding of what is required of them, what they do and do not have the power to do, and what is to happen if the relationship must end. Without these matters being considered and spelled out up-front, conflict is highly likely to ensue. No business will meet its potential unless the co-founders are on the same page.
2. In the absence of registering a company (or other legal entity), your business is YOU. That means that your business’s risks are your personal risks. Your assets – your home and savings or income – are directly available to your business’s creditors. If you are married in community of property, your spouse is just as much at risk. In some cases, it is appropriate to run your business as a sole proprietorship, where there is no division between you as a person and your business. However, where there are risks (as in most businesses), it is wiser to register a company and separate your business’s assets and risks from your own. Once you have concluded deals with suppliers and clients, those deals bind you personally even if you later create a company, unless the other parties agree to transfer the rights and duties to your company (which will seldom be in their best interests). Where it makes sense to register a company, do this right at the outset to avoid complications and protect yourself and your family from day one.
3. In any business, there will be certain terms and conditions that you want to apply to your deals with clients. These need to be spelled out, in each and every transaction. It is worth drawing up a top-notch standard terms and conditions document, to use as the basis for every deal you conclude. You can vary your standard terms and conditions as needed from deal to deal, but will always have a proper basis for every deal which will avoid conflict and miscommunication, and protect you in the event of a dispute. Beware of borrowing documentation from other businesses or found online, as this may not be the best fit for your specific business. Do not copy and paste terms from various other sources as this tends to result in ambiguity and contradictions which might not be apparent until a dispute arises.
4. A great deal of legal difficulties arise from poor communication. In employment relationships, as elsewhere in business, good clear communication of rights and responsibilities is essential. When hiring for your business, ensure that you have a good employment contract in place at the outset. Again, this will help avoid conflict and protect you should a dispute arise. When your business is just starting out, you may not be concerned with matters such as protecting confidential information (client lists and so on), but once your business is established and you experience staff turnover, you will regret omitting the necessary protections from your employees’ contracts.
5. Good, clear agreements with your suppliers are also important. Often you will be on the receiving end of your suppliers’ standard terms and conditions. Ensure that you read and understand these. Before signing, make any amendments or additions that are needed, and have the supplier counter-sign these. There is no magic in a pre-printed form – do not blindly agree to terms that strike you as unreasonable or more risky than you can stomach. If there are issues that the pre-printed form fails to record and which matter to you, write them in.
6. A clear, comprehensive document in black and white is generally preferable to relying upon a fallible human memory. This applies when contracting with clients, suppliers and staff, but it also applies to most transactions your business will engage in. Should disputes arise, a written record can serve as invaluable evidence. It is always a good practice to have a good filing system and to keep good written notes of important transactions with clients, suppliers and employees for later reference. Confirming important discussions and agreements in writing shortly after the event is an excellent practice. If you need to have a performance discussion with an under-performing employee, for example, take a good written minute of the discussion, provide the employee with a copy, and keep a copy on file.
7. Sometimes, a situation looks as if it is heading south long before it actually does. If legal advice is called for, seek it early. It is usually much simpler (and cheaper) to resolve a legal problem in the early days than to untangle the sort of mess that develops after a protracted period of denial and avoidance. Tackle problems early. Don’t wait until you are fairly certain that you have made a hash of things to seek advice. It is much better to follow good advice from the outset than to receive confirmation that you did exactly the wrong thing after the event (and that it is going to cost you dearly to rectify the situation).