5 Legal Mistakes Small Businesses Make (and How to Avoid Them!)

Picture the scene: You’ve quit the comfort zone of employment and a regular paycheck to become your own boss. You’re finally living the dream and running your own business.

To give your business the best chance of success and growth there are some essential legalities you need to consider. Below, we explain how to avoid some of the common legal mistakes small business owners make:

1. No Shareholders Agreement

A shareholders agreement is potentially the most important consideration for any start-up business with two or more founders or investors. You could say it’s the ‘prenup’ of the business world; it’s an agreement between shareholders, where each party agrees on how they will address future scenarios that could occur during the business’ lifecycle.

Key areas it should cover include:

• Decisions investors must unanimously agree on
• Each investor’s financial contribution and their resulting rights or benefits
• Distribution of dividends
• What happens if one shareholder wants to sell and the other/s do not
• Succession planning

The agreement is especially important if you’re going into business with your friends or family. An estimated two-thirds of UK businesses are family owned (source: Institute of Family Business), yet many don’t have a shareholders agreement.

Without this vital contract, any disputes that arise could threaten, not just your business, but the relationships it’s built on. Avoid this by getting a shareholders agreement early in your business’ life cycle.

Read more about the importance of a shareholders agreement here.                                                                                                                                                          

2. Failure to register your trade marks

Your brand could become your most valuable business asset. It communicates who you are, what you do and how you’re different. So, the last thing you want is a competitor using your branding to promote their own product/service. Yet, this is exactly what could happen if you don’t register your brand as trade marks.

Once registered, you have the right to use the ® symbol with your brand to let everyone know your brand is legally protected. This prevents others illegally using your trade marks and protects your brand’s integrity.

Read more about how to use trade marks to protect your brand here.

3. Sharing the ‘Secrets’ of Your Success

You probably have certain ways of doing things that are unique to your business. This is commonly called ‘know-how’ and it’s what differentiates your business. But what’s to prevent employees, contractors or subcontractors sharing this know-how with your competitors?

The answer is not much, unless you have the right legal protection in place. Anyone hired by your company should sign relevant restrictive covenants and a nondisclosure agreement that prohibit them from sharing or copying your know-how and other confidential information.

As an additional point, if you hire freelancers, make sure you’ve secured rights to their intellectual property (IP). If the freelancer has no contract with your business they will retain ownership of the IP they create for you (e.g. blueprints, code). This means you could lose access/use of their designs when they stop working for you. See more about copyrights and design rights here.

4. Neglecting Obligations towards Employees

Small business owners sometimes overlook or are uncertain about their legal requirements regarding employees, including:

Classification: Employees vs Contractors

Hiring employees means extra paperwork, tax requirements, and complex employment legal obligations. This leads some business owners to avoid taking on employees altogether, instead opting to hire self-employed contractors. Business practices like this have contributed to the growing gig economy.

However, beware – there is a strict criteria governing who can and can’t be classed as an independent contractor in the UK, including:

• Whether your company pays the individual on a regular schedule or on an ad-hoc basis (following project completion).
• How much control your company exercises over when, how and for whom the individual can work.

If you misclassify an employee as an independent contractor you could be held liable and risk hefty fines. Using thorough independent contractor contracts will help you accurately classify people who work for you and establish strong working relationships.

Adequate Insurance

Whether you hire employees on a fulltime, permanent or more casual basis, you need adequate employers’ liability insurance – it’s a legal requirement. This insurance covers injuries your employees sustain at work or injury/damage they cause others in the workplace. Cover also mitigates against your financial costs and ensures your legal compliance. It’s also worth noting that all businesses, regardless of size, must assess and manage risk to workers. If you have five or more employees you are legally required to put your risk assessments in writing.

This list isn’t exhaustive. Read more about how we can help you meet your obligations towards employees here.

5. Not Taking Legal Advice

The laws and legislation affecting small businesses are complex and always changing. This is why it’s crucial to seek legal advice at every stage of your business’ journey. A commercial lawyer can assess your business needs and provide the right legal advice to ensure your business remains compliant and has strong contracts in place to protect your commercial interests.

Take the time to find a commercial lawyer you feel comfortable with who understands your business needs. This will give you the best chance for long-term success and growth.

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