Although mistakes come as part and parcel with running your own business, for small businesses, simple mistakes can seriously contribute to business failure. It is therefore imperative that small business owners are not only up to date with the goods/services they are providing, but that they also are aware of commercial and legal issues which could affect the running of their businesses.
There are certain legal mistakes that commonly impact on small businesses, and these are outlined below.
So many small businesses believe that because of their size/informal relationships with partners/clients, agreements do not need to be in writing. The problem is that oral agreements are extremely difficult to enforce. All important, fundamental business contracts associated with the business should be put in writing, no matter how informal your relationship with the other party. This includes shareholders agreements, partnership agreements, service agreements, and supply/distribution agreements.
Partners/shareholders rights and responsibilities need to be documented clearly. Your agreement should include consideration of how much time and effort each person will be contributing to the business, what happens in the event that someone dies or leaves the business, what happens if the business needs more funds and whether the interest from the person who has left/died will be bought back by the business.
The contracts need to be well drafted to ensure they give you flexibility and protection. They also need to accurately reflect your wishes. Although it is possible for you to draft these yourselves from online templates, it is a better investment for you to pay a legal professional to put these in place for you, as it could save you costly expenses in the future.
Another common mistake is to assume that your standard terms and conditions apply to the contract and/or a lack of understanding that what’s in your contract may not be considered lawful by a court and/or that contracts can’t be varied or concluded by email or other communications outside of a written contract.
Ignoring the Law
As the law surrounding businesses can be quite lengthy and complex, it is quite common (and easy) for business owners to turn a blind eye to legal requirements and many businesses believe that if they are genuinely ignorant of laws and argue that as a small business they can’t be expected to know about all the legal requirements, this will be a defence. It isn’t. A classic example of this is the complex area of immigration law and making sure as a business you comply with it.. However, spending time to ensure you have a general and basic understanding of common areas of business law may prevent you from having to face a number of legal issues in the future. If you are in any doubt as to what laws and regulations you need to adhere to, as a small business owner, use the internet to research laws that apply and/or seek legal advice to stay informed.
Under the Companies Act, businesses are required to keep records of all their members, directors and minutes of their meetings (amongst other things). Small businesses are notorious for not keeping up to date with these records (or not doing them at all). Failure to adhere to these regulations could result in personal liability being incurred. It is therefore important that business owners find out exactly what records they should be keeping, and ensuring these are kept up to date.
Not having a good accountant from the off
Whilst it’s really important to get good legal advice at the beginning for things such as shareholder agreements and terms and conditions, it’s perhaps even more important to have a good accountant. If your finances aren’t in order, your business will almost certainly fail, but equally, it’s not just about bookkeeping. Good small business accountants will offer an array of services, including help with a business plan, advice on the best set up, how to best set up if you are one of the ever growing number of self employed or contractors, tax and exit planning or employing family members.
Ignorance of Intellectual Property Issues
Even small businesses that are not in the technological sector will come across intellectual property issues at some point in their business cycle. This could be something as simple as requiring your employees to sign confidentiality agreements, or registering a trademark for a company logo or specific product. If you are at all in doubt about whether you have followed the correct procedures necessary, it is advisable that you seek professional legal advice.
Off-the-Shelf Start Up Packages
Off-the-shelf contracts are becoming increasingly popular with the public as a cheap method of putting in place the legal contracts necessary for businesses. These packages however, need to be used with extreme caution. Each business is individual and unique, and most of the time, its legal contractual documentation needs to reflect that. Trying to apply a standard ‘one size fits all’ legal contract template to a business with specific needs is a dangerous risk to take. Although small businesses are looking for ways to cut costs, and find cheaper alternatives, paying for a legal professional to ensure the business is set up and functioning properly is definitely not an area to cut costs on. Ensuring you have solid legal foundations for your business is a valuable investment that could protect you in the future should legal issues arise.
One of the biggest problems with off the shelf contracts is that it is vital that when using a contract you generally understand it, what are the key elements, which are perhaps negotiable or variable and what happens if either you or the other party breach the agreement, which involves issues which will not be included in the contract necessarily such as the right to cancel or not and how damages might be calculated. You will almost certainly find that a customer, supplier or employee will want to negotiate certain aspects of your contracts so if you don’t understand them, this is a big problem.