10 Common legal mistakes made by start-ups

how to avoid them

by GLS GROUP May 26, 2020

mistake

INTRODUCTION 

The world of commerce can be difficult to navigate, not least due to an intricate web of laws and regulations. Like it or not, start-ups would need to navigate this intricate web.

A failure to do so may result in hefty losses. Even if the effects of such a failure are not tangible, a business could end up suffering from a damaged reputation. Either way, these effects could end up crippling a business.

It is thus important for business owners to obtain a good idea of common legal mistakes that start-ups make, so that they do not fall prey to the same traps that have plagued other start-ups.

In this article, we examine 10 common legal mistakes that start-ups make.

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Mistake 1: Structure of the business vehicle

Which business vehicle structure to adopt? This is likely to be the first key corporate decision that a start-up would need to make. Examples of common types of business vehicles include:

● Sole proprietorship

● Ordinary business partnership

● Limited liability partnership

● Private company limited by shares

Unfortunately, it is not uncommon for start-up owners to fail to appreciate the importance of this issue, and to end up choosing a business vehicle that is not fit for purpose.

A failure to adopt an appropriate business structure could result in huge losses not only to the start-up, but also to the business owner on a personal basis.

In this regard, there are various pros and cons for each business vehicle structure. 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

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Mistake 2: Failing to consider taxes

Taxes could prove to be a significant drain on the financial resources of a start-up. Yet, business owners often fail to consider taxation costs when engaging in commercial activities – these costs could be the difference between finances being in the black or in the red.

Besides, a failure to comply with tax regulations could result in stiff penalties – these may include fines or even business suspensions.

Common types of taxes that start-ups may need to consider include:

● Corporate taxes

● Goods and service tax

● Payroll taxes

dispute

Mistake 3: Failure to comply with corporate decision-making rules

Start-ups are often required to move quickly and decisively to capture the market. This means that commercial decisions would often need to be made swiftly.

Yet, while there is always a temptation for business owners to “bulldoze” their way through certain commercial activities, business owners would also need to realise that they would often need to comply with certain corporate procedures for various types of decisions.

These corporate procedures are typically set out in the laws of the relevant jurisdiction, or in the constitutional documents of the start-up, and may include requirements to:

● obtain specific consents for certain types of decisions;

● convene a general meeting for the purposes of obtaining such consents; or

● provide third parties with ample time and opportunities to object.

A failure to comply with these procedures could result in the invalidation of certain commercial activities that have been taken pursuant to such non-compliance. This could hinder any further business activities.

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Mistake 4: Employees vs Independent Contractors

When engaging personnel for the purposes of operating the business, it is important to consider if they are employees or independent contractors. This distinction is crucial as an organisations typically owes more obligations to its employees as opposed to its contractors.

These obligations are potentially manifold, and may include:

● an obligation to pay pensions

● an obligation to provide annual leave and medical leave

● an obligation to provide parental leave benefits

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).

Business owners who fail to consider this issue may find themselves facing unexpected employment-related claims, which could place a strain on the start-up’s financial and manpower resources.

business partners, partnership concept with two businessman handshake

Mistake 5: Failure to ascertain contracting positions

Supply and service agreements form the bedrock of many commercial engagements.

In this regard, start-ups should ascertain their business’ contracting positions with respect to certain big-ticket legal provisions in their supply/service agreements. These provisions typically relate to:

● Indemnities

● Representations and warranties

● Termination

● Limited liability and unlimited liability scenarios

● Intellectual Property

● Confidentiality

A failure to grasp these issues could result in the business assuming a greater amount of potential liabilities that is necessary and reasonable. This could lead to hefty losses if supply/service engagements go awry.

Unfortunately, many business owners fail to appreciate the importance of these legal provisions, and sign on contracts without taking a proper read of them, all with a view of “getting the deal done”.

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Mistake 6: Comply with data privacy obligations

Businesses often rely on personal data to facilitate smooth operations. However, the proliferation of various high-profile data breaches in recent years has given rise to an increasingly strict data privacy enforcement climate across the globe.

This means that it is becoming increasingly important for start-ups to 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.

Yet, start-ups often fail to appreciate the importance of complying with data privacy laws. Reasons for such a failure may include:

● An underestimation of the amount of personal data that the start-up actually collects and processes

● A failure to appreciate the gravity of the consequences of failing to comply with data privacy laws

Whatever the reasons, start-ups would need to pay attention to their data practices to ensure compliance with data privacy laws.

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.

Lightbulb Idea

Mistake 7: Failure to protect Intellectual Property (‘IP”)

Intellectual Property (“IP”) is generally defined to mean “creations of the mind” – these include inventions, literary and artistic works, and symbols/names/images used in commerce.

IP may prove to be extremely valuable and crucial to a start-up’s operations. In this regard, it may be critical for a start-up to protect its exclusive rights in its IP.

Having such exclusive rights allows a start-up to build a competitive advantage over its market rivals, and may even provide the platform for a start-up to monetise its IP.

Unfortunately, start-up owners may not appreciate the importance of protecting the exclusive rights in their IP, and may overlook this issue in the pursuit of other commercial activities.

Such an error could prove costly, as it could erode the start-up’s competitive advantage over its rivals, and could even deprive a start-up of a source of substantial revenue in time to come.

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Mistake 8: Confidentiality

Start-ups may be required to disclose a wide range of confidential information to their personnel, as well as to their own service providers and business partners.

Such confidential information could be extremely valuable to the business – they may entail trade secrets or novel ideas. Indeed, the value of such confidential information often lies in the very fact that they are confidential.

Yet, start-up owners may fail to take adequate steps to protect the confidentiality of such sensitive information, and this could lead to a massive erosion of profits.

Back view of businesswoman holding papers in hands-1

Mistake 9: Lack of standard form contracts

Standard form contracts are a terrific measure that start-ups can adopt to protect their commercial interests and manage their legal risks.

After all, these standard form contracts can reflect the start-up’s contracting positions on big ticket legal provisions, and it is typically easier to negotiate down from a high starting point than to negotiate up.

Besides, engaging on one’s own standard form contract lends significant advantages to start-ups, as opposed to contracting on third-party paper. These advantages may include:

● less time needed to review that contract as the start-up will be familiar with its own standard terms;

● less effort needed to propose amendments; and

● assurance that the contract being used it appropriate for the deal at hand.

Unfortunately, many start-ups do not appreciate the importance of having their own standard form contracts, and gladly sign on contracts that are prepared on third-party paper.

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Mistake 10: Failure to obtain all necessary licenses and permits

Depending on the type of business activities that it engages in, a start-up may be required to hold specific licenses or permits. For example, a start-up that supplies petrochemicals may be required to obtain certain permits in relation to product safety.

A failure to do so could result in hefty penalties from the regulatory authorities, or even suspensions.

Unfortunately, start-ups owners often fail to appreciate the need to conduct a proper due diligence for the purposes of ascertaining the licenses and/or permits that they need.

 

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Conclusion

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.

Check out our GLS Start-Up Support (Bronze) and our GLS Start-Up Support (Silver).

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WHAT’S NEXT?

If you liked this topic, you might also like Legal 101s - Intellectual Property.  

*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.  

 

GLS Group - Nominated by Financial Times as the:
"Most Innovative Law Firm - Asia Pacific"
(2018)
Innovation through Technology 
The Middle East Legal Awards 2020

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