4 Common Legal Pitfalls for New Businesses

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Launching a brand new business is an exciting time. However, it’s vital to make sure that all the right contracts, agreements and registrations are in place right from the very start to keep you business compliant and on track.

It’s not uncommon for startups and new businesses to find themselves caught up in expensive legal disputes simply because they neglected to set up some simple provisions and protections from the outset.

In this article, we are going to look at four common mistakes made by new business owners – and explain how they can be avoided.

Pitfall 1: No adequate Shareholder’s Agreement

When entering into a business relationship with friends or family, it may seem natural to make only verbal or otherwise informal agreements. Often, the assumption is that every party shares the same values and will unquestionably get along, and thus a simple handshake will suffice.

Without a binding agreement laying out the rules on how to resolve any disagreements, a simple difference in business philosophy or opinion can often escalate into an expensive and messy legal dispute.

A Shareholder’s Agreement is a legal contract that specifies each parties’ rights and obligations, stipulates how decisions should be made, how shares can be sold or transferred, dispute resolution, and so on.

Pitfall 2: Failing to protect intellectual property

The term ‘intellectual property’ (IP) refers to original creations by your business such as logos, slogans, products, inventions, videos, novel ways of doing business, or other innovations. However, new businesses can sometimes neglect to fully establish IP ownership in some matters.

For example, they may have taken on a contractor to create some elements on their behalf – but not thought to buy the IP outright. This can create an issue if they later wish to sell the business, but there are key elements they do not have the right to sell.

Another common mistake is failing to protect an innovative product or invention with a patent – which often leaves no recourse should a competitor copy the product or invention in the future.

It is important to take the necessary time to make sure that the business does fully own all the intellectual property it relies upon to guard against those who might want to ‘borrow’ them.

When naming your new venture, it is also vital that you research thoroughly to make sure that the name you have chosen does not infringe on the copyright or trademark of another entity.

Pitfall 3: Lack of legal advice at the beginning

Starting a new business can be extremely expensive, and many enterprises do not turn a profit until they have been in operation for a year or more. Therefore, keeping costs low is a key consideration for many entrepreneurs and shareholders.

It follows that sometimes corners are cut regarding legal advice for important documents and decisions, on the mistaken assumption that many of these matters are a ‘mere formality’ and unlikely to become a problem.

Unfortunately, this can turn out to be short-sighted; a problem that could have been avoided with the relatively inexpensive help of a solicitor beforehand could turn into a costly legal problem.

Pitfall 4: Lack of knowledge in regard to essential permits, licences, and registrations

Depending on your sector and your intended activities, you may be required to acquire additional documents such as environmental permits, food safety registrations, an alcohol licence, a public surveillance licence (if you have CCTV), and so on.

Some of the kinds of business that typically require special licences include:

  • Childcare
  • Ear piercing
  • Finance
  • Gambling
  • Goods haulage
  • Import and export
  • Pets
  • Security guards
  • Sports coaching
  • Taxis

In many cases, licences are obtained from the local authority. In other situations, there might be a relevant trade association that issues the documents you need.

Trading without the right licences and permissions can lead to heavy fines, your business being shut down, or even a criminal conviction.

There are many things to think about and do when starting a new business, but familiarising yourself with the relevant laws and regulatory bodies for your industry is essential – as is seeking expert legal advice to confirm that you are compliant.

With the help of a good commercial law solicitor, you can ensure that you will be protected against all of the common pitfalls outlined above.

With all legal matters well under control, you can fully concentrate on the success of your new business – without having to be concerned that you may have left yourself open to an otherwise preventable legal challenge.

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Girlings Solicitors is a well established law firm based in Canterbury, Herne Bay and Ashford. For more than 100 years, Girlings has supplied expert legal advice to businesses of all sizes around Kent.