Business Law & Compliance

The legal issues you need to cover when a young business

5 min read

26 November 2014

It’s important to consider the legal implications of your business at the beginning of its growth push.

We spoke to Derek Dawson, solicitor and head of commercial department at Paul Crowley & Co, about the most common questions he gets from new businesses.

What’s the most important legal consideration to think about?

They need to look at debt and suffering unpaid debt. If you are going to give credit include terms and conditions and make sure they’re suitable. They need to be reasonably bespoke and you need to make sure they’re incorporated into any contract. You can incorporate that in a number of different ways; get them to sign up before you do anything, you can put them in invoices and include in emails that they’re available on request. 

To avoid bad debt you need to know who you’re contracting with. This means investing in some risk management; you may be more interested in the business than working out whether you’re going to get paid, but you need to have risk assessment in place. 

What can SMEs do if they incur bad debts?

Be aware of the Late Payment of Commercial Debts (Interest) Act 1998, irrespective of whether it’s in your terms and conditions. It’s quite a useful tool. You can charge interest eight percentage points over base rate. You may be entitled to compensation.

What about funding and working with banks?

Be aware of the personal guarantees. If you’re a limited company a bank or supplier may require personal guarantee. You may not realise your personal assets are up for grabs, not just your company’s.   

What do startups need to think about when it comes to corporate structure?

For a new business, limited liability’s generally better. [However] for obvious reasons, people may be hesitant to trade with new entities. 

The big one for new businesses is the limited shareholder and partnership agreement, to record what investments are being made – what they are providing to the business. What will happen on the fallout? When they start, most people aren’t thinking about that, but if there’s a problem in the future, what will happen? It’s a useful tool because everyone goes into it with their eyes open and you avoid a potential expensive squabble. 

How have these issues changed recently?

Employment’s a big one. It’s good for new business to have insurance against cases. If you have insurance you minimise the risk. Even good employers still get taken to court. 

What are the basic tools they need to handle taxes and would you recommend seeking advice?

Always work with a good accountant. They’re worth their weight on gold, don’t try to do it yourself. 

Are there any particularly government agencies or advice sources that can help with startups research legal issues?

BIS [Department for Business, Innovation & Skills] have good guidance on debt. British Chambers of Commerce is generally quite useful. For minimum payment as well, if you join you have access to all their material. 

What about taking on premises and staff?

Look at the break clauses. If they enter into a long lease and they’re uncertain whether it will be successful. Landlords aren’t overly keen, but they will do it. 

Make sure you have good references. Try to find as much information as possible, check the qualifications, examine the documentation. Supervision of staff is critical, you don’t know what you’re going to get until they start. A lot of this is just common sense. 

How much of this stuff should be included in the business plan?

It’s entirely separate to most of these issues. They need to think about what shareholders are putting in. This is a matter for the accountant. They can prepare forecasts and help with planning.