Key legal issues for early-stage businesses

Key legal issues for early-stage businesses

In a show of strength for the UK’s start-up environment, a recent report found that over 900,000 new companies were incorporated in the UK last year – a new record.

Starting a business is an exciting adventure, but it’s important to consider its various legal issues and pitfalls early on. This will help you avoid issues further down the line and allow you to focus your attention on making sure your new business is a commercial success.

This article summarises some key legal issues that start-ups, spinouts and early-stage businesses should consider.

Choosing your company’s legal structure

It is vitally important that, in the haste of bringing an innovative product or service to market, you don’t overlook the importance of choosing the correct legal structure for your business.

If you’re operating as a sole trader or partnership, you will be personally liable for the business’ liabilities. This might not be a good idea if you are entering into valuable contracts to undertake to deliver products or services to customers.

By using a limited company, you can benefit from limited liability. This means that the company is on the hook for your business’ liabilities, not your personal assets.

However, a limited company does come with some drawbacks, such as having to make certain filings with Companies House (e.g., annual accounts and confirmation statements). Through discussing your business’ needs and aspirations, an experienced solicitor will be able to recommend the most suitable legal structure for you.

The role of the company secretary

Private limited companies are not required by law to appoint a company secretary. However, we often recommend appointing one – it’s an important role that ensures that your business complies with its statutory duties and responsibilities, such as:

  • Maintaining the statutory registers: this takes on extra importance under Scots law, where a shareholder doesn’t technically hold title to their shares until they have been entered into a company’s register of members – which is contained within its statutory registers.
  • Taking minutes of board meetings: these are used to document key decisions taken by the directors and are a legal requirement under section 248(1) of the Companies Act 2006.
  • Reporting changes to Companies House: you must tell Companies House within 14 days of certain key changes made to your company, such as changes to its registered office, active directors or People with Significant Control Register.

Therefore, it is a good idea to appoint a company secretary to help you comply with these requirements.

If you cannot find a board member or other suitable candidate willing to take on this role, then you might consider outsourcing the role to a company secretarial service provider. Please get in touch with us if you would like to know more about the service that we offer.

Entering into agreements

With your legal structure secure and company secretarial duties in check, the scale-up and operation of your business will inevitably involve entering into new contracts.

It can be tempting to use supplier or customer templates, but by doing so, you risk signing up to agreements that are heavily weighted in favour of the other party, that contain unenforceable terms, or do not adequately protect you from the risks you face if the other party doesn’t hold up their end of the bargain.

Each business has a unique set of risks and requirements, and we recommend that an experienced solicitor advises you on the terms of any agreement prior to signing.

Protecting your rights as a shareholder

A shareholders’ agreement is a legally binding contract that can be used to protect your position as a shareholder. It outlines the rights and obligations of each of the shareholders of the company, covering issues such as distribution of profits, board representation, voting rights, restrictions on the transfer of shares, dispute resolution mechanisms, and more.

If you are inviting new shareholders into the business to raise funds, it is crucial that you enter into a shareholders’ agreement to protect your position.

What else is there to consider?

This list of key legal issues for early-stage companies is far from exhaustive and there are various other issues worth considering, such as:

  • Protecting your business’ intellectual property
  • Employment contracts and policies
  • Share incentive schemes

Please feel free to get in touch with Aidan Walker or your regular Anderson Strathern contact if you would like to discuss any of these options in greater detail.

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