Starting a business is exciting, but it can also be thoroughly daunting, as entrepreneurs would need to deal with a whole host of matters.
Entrepreneurs may not know if they can trust their business partners. They may not know if their service providers are indeed giving them bang for their buck. They may not know if the market will react well to its products.
To add to all these concerns, entrepreneurs may need to navigate the intricate web of laws and regulations. A failure to do so may result in hefty losses, and may even affect the viability of the business.
In this article, we examine the top 10 basic legal considerations every start-up entrepreneur must know.
Legal Consideration 1: Structure of the business vehicle
One of the key decisions that an entrepreneur would need to consider is the structure of his/her business vehicle. Examples of common types of business vehicles are:
● Sole proprietorship
● Ordinary business partnership
● Limited liability partnership
● Private company limited by shares
There are various pros and cons of each business vehicle structure, and registration formalities across each business vehicle may differ. In determining which structure to adopt, entrepreneurs may wish to consider factors such as:
● Taxes applicable to each such structure
● Speed of setting up each such vehicle
● Whether liability will be limited, and the extent to which liability is limited
● Laws applicable to each such structure
A private company limited by shares remains one of the most popular types of business vehicles around, as the liability of a shareholder for such a business vehicle is generally limited to the amount of capital that he/she had invested in the vehicle.
Legal Consideration 2: Amount of shares to hold
Where an entrepreneur intends to incorporate a company limited by shares for the purposes of his/her business and intends to engage investors, it is important to consider how much shares he/she intends to hold in the vehicle.
An entrepreneur may wish to third parties to invest funds in the business, in return for shares in the company. Indeed, this is a common method for fundraising.
Yet, an entrepreneur would also need to be mindful that doing so may dilute his shareholding in the company. This may result in the entrepreneur having less decision-making powers with respect to his/her business.
In short, funds may come at the expense of control in the business. It is ultimately a balancing act that the entrepreneur needs to strike.
Legal Consideration 3: Where to incorporate
Entrepreneurs would need to decide where to incorporate their business vehicle. This is an important decision as business law regimes differ across jurisdictions. This could mean differences with respect to a whole host of matters, including:
● Corporate tax levels
● Employment practices
● Minimum capital levels
Incorporating in a business-friendly jurisdiction could save businesses significant costs – there is after all, a reason why so many companies are incorporated in Delaware.
Legal Consideration 4: Employees vs Independent Contractors
Personnel are crucial to the smooth operation of a business. When engaging personnel, it is worth considering if they are employees or independent contractors.
This distinction is crucial as employees tend to have more rights (including rights imposed by statute) than contractors, whose rights are generally entirely defined by reference to a services agreement.
For example, an employer may under law be required to pay pension contributions to its employees, but not to independent contractors.
Under general common law, the question of whether an “independent contractor” or “employee” relationship exists is a fact-sensitive enquiry. Factors that may be relevant include:
● the degree of control exercised by the company over the individual;
● whether the work of an individual is done as an integral part of the business of the alleged employer; and
● whether there is any representation of the individual as part of the company’s business (e.g. name cards, uniforms, etc.).
Legal Consideration 5: Contracting positions
A business is likely to enter into supply and/or service agreements, both in the positions as a customer and as a service provider – the former to support its operations and the latter to generate revenue.
It is important for an entrepreneur to ascertain his business’s contracting positions with respect to certain big-ticket legal provisions in supply/service agreements. These provisions typically relate to:
● Representations and warranties
● Intellectual Property
● Limited liability and unlimited liability scenarios
A failure to grasp these issues could result in the business assuming a greater amount of potential liabilities that is necessary and reasonable, and could lead to hefty losses if supply/service engagements go awry.
Legal Consideration 6: Data privacy
Personal data could prove crucial to the smooth operation of a business. Even where a business model does not rely heavily on personal data to generate revenue, a business often ends up collecting and processing more personal data than it expects.
Given an increasingly strict data privacy enforcement climate across the globe, it is important for entrepreneurs to ensure that they comply with data privacy laws. A failure to do so could result in hefty fines for regulatory authorities, as well as a tarnished reputation in the market.
While data privacy laws may differ across jurisdictions, a general rule of thumb is that businesses must obtain a data subject’s consent before collecting, using and process his/her personal data, and must implement proper safeguards to prevent any data breaches.
Legal Consideration 7: Intellectual Property (‘IP”)
IP could prove critical to the success of a business. Indeed, the effective management of its IP can mean the difference between success and failure of the business.
A business that engages in effective IP protection is able to protect its competitive advantage. An effective IP protection regime can potentially reap many benefits, including:
● Preventing competitors from using the business’s technology
● Preventing third parties from using the business’s marks and logos to sell other products
● Preventing third parties from tarnishing the image of the business
● Enabling the business to itself against IP lawsuits by others
In addition, effective IP protection can serve as a source of revenue for the business. IP protection can help businesses reap financial benefit through the licensing or selling of IP rights.
Legal Consideration 8: Confidentiality
Young businesses may enter into collaborations with other entities as they attempt to make headway in the commercial world.
Over the course of such collaborations, it is not uncommon for a business to be required to disclose certain sensitive information to its partners. Such sensitive information may include trade secrets and novel business ideas.
It is crucial to ensure that these partners keep such information confidential, as the release of such confidential information into the public sphere may scupper the business’s chances of succeeding.
Accordingly, it would be prudent for businesses to require their partners to undertake various confidentiality obligations. This may be done through the execution of a non-disclosure agreement. A non-disclosure agreement typically covers matters such as:
● Scope of confidential information
● Consequences of breaches of confidentiality
● Representations and warranties with respect to the confidential information
Legal Consideration 9: Dispute resolution
Differences between business partners are inevitable. It is crucial to ensure that such differences are resolved in a manner that is quick, amicable and cheap. Doing so will ensure that parties continue collaborating on good terms, without experiencing a significant drain on time and money.
One way to do so is to implement informal dispute resolution mechanisms, such as:
● Consultations between the management teams of the business partners
Informal dispute resolution mechanisms are crucial in avoiding disputes, as traditional means of dispute resolution such as litigation and arbitration tend to be more adversarial, expensive and invasive approach.
Legal Consideration 10: Licenses and permits
A business may be required under law to hold specific licenses or permits, depending on the type of business activities that it engages in. For example, a business that supplies foodstuffs may be required under law to obtain certain quality assurance certifications with respect to its products, before supplying them to the mass market.
It is important to obtain all necessary licenses and permits before engaging in the relevant business activities, as a failure to do so could result in hefty penalties from the regulatory authorities, or even suspensions.
It would be prudent to engage a lawyer from the relevant jurisdiction to ascertain the licenses and permits that you require.
We hope that this article has been helpful to you as a start-up trying to make headway in the exciting, yet uncertain, world of commerce.
To aid in your quest to survive and thrive in the complex business world, GLS offers a Total Start-Up Support solution which provides you with all business-critical templates for the price of what most pay for coffee each month.
Needless to say, our solution comes with a 24/7/365 helpline whereby one of our legal professionals can assist you with any queries that you may have.
If you liked this topic, you might also like Top 5 ways of avoiding disputes.
*The above content does not constitute, nor is it offered as, legal advice of any kind. GLS Solutions Pte Ltd is not a law firm and any support provided pursuant to this entity is not regulated legal advice or legal opinion.