Thinking of launching a startup? As well as having an innovative idea, a strategic plan and the willpower to turn your aspirations into reality, you need to take a whole host of legal issues into consideration when establishing your company. From employment law to your business structure, read on to find out about the legalities you need to be thinking about.
- Complying with employment law
If you are planning to hire employees, then being compliant with employment law is imperative. Fall foul of the relevant legislation and you could face lengthy and costly tribunals, with the average tribunal costing a business £8,500. This is without even mentioning the potential upheaval and effort of replacing unhappy staff and the damage to your reputation that this could cause.
Employment law is very complex, however, and there are many different rights that employees are entitled to, like privacy and protection from unfair dismissal. You should consider consulting a lawyer when it comes to tasks like drawing up employment contracts, though much of the onus will be on you to ensure that your startup is compliant with employment laws. For instance, issues like holiday entitlement and health and safety are very much in your domain. To help safeguard your small business, you should make sure you keep up to date with and fully understand the latest legislation surrounding employment.
- Protecting your intellectual property
Safeguarding your intellectual property (IP) is a crucial legal consideration in the early stages of your startup. There are a number of different IP rights that you may need to protect, depending on what type of business you are running. Most startups usually need to apply for copyright and trademark rights, with the former ensuring others cannot copy your works of authorship, like business plans, and the latter typically used to ensure others cannot use your business logo. Some startups will also need to apply for patents to protect inventions, and register design rights for any products they have invented.
In order to register your IP, you will first need to conduct a search to ensure that something very similar or identical has not already been registered by somebody else. When this has been cleared, you’ll need to apply to the Intellectual Property Office to register your own IP. This process can be time consuming and difficult, so it is worth enlisting a company to help register a patent, copyright, a design or a trademark on your behalf. This can cut your administration time and enable you to streamline your workflow.
- Deciding on a legal structure
You also need to think long and hard about what type of legal structure you want your business to employ. Unless you want to raise substantial funds on the stock exchange within a set period, it is inadvisable to start as a public limited company. You therefore have a four way choice between being a sole trader, a partnership, a limited company or a limited liability partnership (LLP). What is right for you depends on what type of business you are, and each have their own advantages and drawbacks.
If your startup is low budget and you are not planning to employ anyone then your best bet may be to launch your venture as a sole trader (you can still have employees in this structure). The advantages of being a sole trader are that there is little red tape and minimal set up costs. However, the law will see the business and its owner as the same entity, so any business debt can be met from your own wealth if the startup fails. In addition, you could end up paying hefty tax figures if your business starts to grow significantly, as profits are taxed as income; you will pay 40% tax as soon as you earn above £41,865 and 45% above £150,000. Another option is to become a partnership, a structure that is often used when two individuals want to launch a venture together. In this structure, you’ll again be responsible for any debt incurred by the business, and profit will again be taxed as income.
If you really want to make your venture sound credible, it could be worth incorporating as a limited company at the Companies House. This will also make it simpler to borrow money, and as a limited company is a separate legal entity from its directors, the business—not you—will take on any debts if it goes under. The tax regime is also more favourable to limited companies than to a sole trader, as company directors are taxed as employees, just like others who work for the business. Finally, you could incorporate as an LLP. This is almost a hybrid of limited liability companies and partnerships, and must have at least two ‘designated members’. Just like a limited company, a LLP model limits the liability of members, but profit will also be taxed as income.
While there a quite a few hoops to jump through, ensuring you comply with these legalities will help increase the chances of the success of your venture.