6 legal aspects of setting up your business

Clear Books Must reads | April 2015

6 important legal aspects of setting up your business

If you’re thinking of setting up your own business —

congratulations!

You’re in good company, joining 5.2 million other UK

entrepreneurs.*

As you’re no doubt aware by now, there are fun and

not so fun aspects to this process. But starting your

own venture can expose you to all sorts of risks so it’s

important to take the time to consider things like:

• Could you be personally liable if a future

customer decide to sue you?

• If you take on employees what checks do you

have to carry out on them?

• Do you need any sort of insurance?

• What if someone tries to steal your idea or

company name?


This guide will look at all of these questions along with a number

of other areas of risk you might face when setting up a new

business, and will provide tips on how to deal with those risks at

the outset.

Ideally you should start thinking of these issues before you even

start your business, but you should continue to monitor them as

the business grows.

1. Legal structureThere are a number of different ways you can set up your

business. Reasons why you might choose one form over another

include tax, ease of administration, and confidentiality of the

business’s information.

Ultimately you need to balance these different issues and decide

which structure is best for your business.

One important area which is affected by your business type is

liability to third parties such as customers or creditors.

Sole trader

As a sole trader you, the individual, are the business. If a third

party wants to sue your business e.g. because you didn’t provide

the services you agreed to, or if you haven’t paid a bill, then they

can sue you personally.

This means that your own personal assets could be at risk:

personal savings, your house, your car and so on. So whilst it’s

the most simple way to start a business, it has the potential to be

quite risky.

Partnership

In a normal partnership, the partners have unlimited personal

liability—so each partner shares the liability and financial risks of


the business and, as with a sole trader, personal assets can be

placed at risk.

Any partner can be sued by a third party and each partner is

liable for the whole loss (though they could then counter-claim

from other partners). So, for example, if there are two partners

and one makes a mistake, the person claiming for the losses

suffered as a result of that mistake could sue either partner for

the WHOLE amount - even the one who wasn’t involved in the

issue.

They might choose the other partner because they have more

money. And whilst that partner could claim back half of the

liability from the original partner, if that partner has no money,

there would be little value in such a claim.

To address that risk, a limited liability partnership can be set up.

Under an LLP, each individual partner’s liability is limited to the

amount they invest (excluding in the case of fraud, or fraudulent

or wrongful trading).

Company

Setting up a limited company limits the liability of the owners of

the company to the amount they invest in buying the shares.

Anyone suing the business sues the company — which has a

separate legal personality to the owners and directors.

Therefore your own personal assets such as your home and

personal savings are protected if they are owned by you rather

than by the company.

However, as a limited company, certain filing requirements

with Companies House are more onerous. There are (personal)

penalties for failure to comply with these requirements so it’s

important to be organised and know when filing deadlines are

etc.

You should also be aware of which decisions will require board/

shareholder approval and keep a record of all decisions — even if

you are a sole shareholder or director.


2. Drafting Terms and ConditionsSo once you’ve set up the legal structure of your business, what

else do you need to think about?

For almost all businesses, it’s prudent to put in place terms and

conditions that govern the relationship between your business

and its customers. So, for example, when they buy something

from you, the purchase will be subject to your terms and

conditions and should protect your business from liability.

Note that certain conditions are implied by law and can’t be

contracted out of e.g. goods must be of satisfactory quality.

In your terms and conditions you should set out what risks the

customer takes on themselves that you are not responsible for.

For example, if you provide links to third party websites, you state

that customers visit these at their own risk.

You can also use your terms and conditions to clarify that you do

not guarantee certain things that are outside your control, such as

the internet always working. You set out clearly what you are not

liable for, or alternatively put caps on your liability.

Obviously you can’t say that you aren’t liable for anything. Any

terms and conditions must be reasonable, so you may want to

take professional advice before drawing them up.


3. Professional Indemnity InsuranceAnother way to protect yourself if you are sued by third parties is

by getting professional indemnity insurance.

This type of insurance is relevant if your business gives advice,

offers a professional service, or handles data or intellectual

property.

In these sectors, you could be sued for negligence that causes

your client loss e.g. you give incorrect advice, you lose your client’s

data etc.

This won’t stop you getting sued, but it could cover the costs of

dealing with any such claims, including both the legal costs of

handling the claim, and also any potential pay out if you lose.


4. Registering with the information commissionerIf you are handling personal data, you must register with the

information commissioner. Failure to do so is a criminal offence.

If you are dealing with personal data you need to be aware of the

data protection act. ‘Personal data’ is very widely defined and is

essentially anything that enables you to identify an individual such

as name or email address.

Strict restrictions exist around what you can do with that data e.g.

you can’t disclose it or transfer it.


5. Taking on employees There are a few essentials to consider when you start hiring

employees:

a. Take out employer’s liability insurance— this is a legal

requirement and will help cover you if you are sued by an

employee.

b. Ensure that you have employment contracts with those

employees. This will give certainty to the arrangement between

you and the employee. If you don’t have this certainty, you open

yourself up to disputes with your employee about what their

rights and obligations are.

This will set out an employee’s:

• employment conditions

• rights e.g. salary, holiday entitlement, benefits

• responsibilities — working hours

• duties — role, what is expected of them

As well as providing certainty around what an employee should

be doing, and also getting in return, it can help when it comes

to an employee leaving (either voluntarily or as a result of being

dismissed) as you can follow the terms of the contract regarding

the process that should be followed.

As your team of employees grows you could consider having a

‘staff handbook’ which doesn’t form part of their contract but sets

out what is expected of them, as well as what they are entitled

to as an employee of the business. This should include any

disciplinary/dismissal process. Again, this should be reasonable

and fair to both parties.


c. Consider getting employees to sign an NDA (non disclosure

agreement), either as part of their employment contract or

as a separate agreement. This is to protect your confidential

information such as customer lists and technical secrets. This

will help to protect you from employees stealing your ideas or

customers — not only during employment but after they have

left.

d. Workplace Health & Safety is also crucial. If you take steps to

train employees and ensure a safe working environment then

you minimise (a) the risk of an accident occurring; and (b) the

chances of being sued if an accident does happen.

e. Carry out appropriate checks on employees such as getting

references and, in particular, checking that they have the right

to work in the UK. You could face fines of up to £20,000 for

employing an illegal worker. If you are found to have knowingly

done this, you could receive an unlimited fine and even be sent

to prison.


6. Trademarks A trademark is different from a patent. A patent is a unique

invention, while a trademark could be the name of that invention,

the name of your company, or the name of a product.

Registering your trademark with the UK Intellectual Property

Office gives you the exclusive right to use your mark for the

goods and/or services that your registration covers in the United

Kingdom.

The first step is to search the UK trademark database to see

if someone has already registered that name in respect of the

particular goods and services you want to offer in respect of that

name.

If no one has registered the mark, you can apply to register

that name yourself. The forms are available on the Intellectual

Property Office website.

You will need to ‘set out your mark ’, and list the goods and

services which you want to provide in relation to that mark.

These goods and services are divided into classes as set out on

the website, so you would need to identify which class(es) are

relevant. Think broadly —and also consider future expansion.

So for an accounting software company, you would consider the

product but also training and any other services which might go

along with it.

Applying for a trademark costs roughly a couple of hundred

pounds, this increases if you want to apply for numerous classes.

The fee is payable even if your application is unsuccessful - which

is why it’s very important to carry out your searches before you

apply. Once you have applied, people have the opportunity to

object to your mark. If someone does object, the process will

become more lengthy and time-consuming as both parties submit

evidence. However, a simple application, where no objections are

received, can be completed within about four months.

Once you have your protection it will be much easier to stop

someone else using your mark, as if this occurred you would

tell them to stop and use your registration as evidence. If they


refused and you had to go to court, having a registered trademark

would be very good evidence that they should stop.

It is possible to have rights to a mark that have not been

registered but it would be much more difficult, time-consuming

and expensive to bring a claim against someone using your mark.

Further, you might find that someone else applies to register their

mark before you, then you are on the back foot in terms of trying

to prove that you had the right to the mark first. So the relatively

small upfront fee could end up saving you a lot of money in the

long run.

If you will be using your brand in countries other than the UK you

also need to get protection in those countries.

You could apply to countries individually, but this could be time-

consuming and costly — and difficult due to the many different

processes. Or you can go through the World Intellectual Property

Organisation to ‘extend’ your UK mark into other jurisdictions

such as the EU or the US. This process will incur further fees

(£1,500/£2,000 for the US and EU— depending on the number of

classes) and it isn’t straightforward so you need to make sure you

definitely want this protection before you apply.


Conclusion These are just a few of the legal requirements you should

consider when starting your business — ones that will help you

protect yourself and your business whilst setting firm long-term

foundations so nothing comes back to bite you in the future.

Please see below for a list of contact details for the organisations

mentioned above:

• Companies House

https://www.gov.uk/government/organisations/companies-

house

• Information Commissioner

https://ico.org.uk/

• UK Trademark Database

https://www.gov.uk/search-for-trademark

• UK Intellectual Property Office

https://www.gov.uk/government/organisations/intellectual-

property-office

• World Intellectual Property Organisation

http://www.wipo.int/portal/en/index.html

• *Federation of Small Businesses

http://www.fsb.org.uk/stats

www.clearbooks.co.uk

twitter.com/clearbooks

facebook.com/clearbooks

linkedin.com/company/clear-books

https://www.gov.uk/government/organisations/companies-house

https://ico.org.uk/

https://www.gov.uk/search-for-trademark

https://www.gov.uk/government/organisations/intellectual-property-office

http://www.wipo.int/portal/en/index.html



http://www.clearbooks.co.uk

http://twitter.com/clearbooks

http://facebook.com/clearbooks

http://linkedin.com/company/clear-books