How To Avoid The Legal Pitfalls when Setting up Your Own Business
No matter who you are you will make mistakes at some point in your business life and unfortunately the law is not very forgiving – ignorance is not a defence. Here are some of the common pitfalls to watch out for when setting up your own business.
A partnership is formed when two or more parties form to start a business, sharing the workload and investing capital to get things going. It is always wise to have a written partnership agreement and get it checked by a solicitor. If you do not have a proper agreement and it all goes wrong, the partnership will be covered by the Partnership Act 1890, whose provisions may not always seem fair.
For example, under it partners can withdraw without giving notice. This could mean they insist on the immediate return of their capital and the business may be forced to close down as a result. If you do not however, have an agreement you may be liable for all sorts of costs and you have no legal standing. It is very important to make sure all of your agreements are legal and will withstand in a court of law.
You can find yourself in a partnership without realising it, for example, if you run a business with somebody but don’t employ them, this often happens with husbands and wives or other family members. In a partnership, each partner is responsible for business debts incurred by other partners and there is no limit to their liability.
Put Everything in Writing
I cannot stress enough how important it is to have everything in writing. If things go wrong you have no legal standing without some form of documentation (which includes all correspondence), contracts are the basis of all business relationships. A contract will include four key components: Consideration, an obligation to pay or a promise to provide something in return for something of value. Certainty, the contract must clearly state what is expected of all parties. The intention to be legally bound and an offer and an acceptance. However, contracts can be oral and it isn’t always clear when one has been made.
Confirm every agreement in writing so everyone knows where they stand. What is the brief? Who will pay? When? How much? Are expenses included? What are the acceptance criteria? Who will own copyright? It is important that all aspects are covered and that there are no grey areas.
Make Sure all Employees Have a Contract
It is very important to have a contract of employment in place from day one for all employees. Make sure that all new employees are entitled to work in this country, or you could face heavy penalties. The contracts act to protect both parties.
Know your Employment Laws
Employment laws in this country are very precise on what you can and cannot do. Before you fire someone, make them redundant or change their terms and conditions of employment, take legal advice. If you don’t, you could find yourself open to claims for unfair dismissal, discrimination or breach of contract. Also warn employees that discrimination, sexual harassment and other illegal acts will not be tolerated.
The Importance of Health & Safety
If you fail to carry out your health and safety obligations you may face prosecution, your insurance premiums may rise and you may find difficulty in obtaining insurance altogether. In the worst cases your business may be closed until you adhere to the Health & Safety laws. Information packs are available from the Health & Safety Executive which will outline your legal requirements. The Government are legally entitled to carry out spot checks on your premises at any time.
Make Sure you are Insured
Insurance is vital from a financial viewpoint. There are also legal requirements for employer’s and public liability insurance. If you sell products, product liability insurance will protect you if someone injured by a defect in your product successfully sues you.
Are you Covered?
Many people find it hard to imagine that work they have done will result in a claim for hundreds of thousands of pounds. However, most people only contribute a link in a chain, so the effects of a mistake can be out of all proportion to their individual contribution. If you offer services or advice you must get adequate professional indemnity insurance. Indemnity cover is needed for years after the work has been done, because it has to cover when the claim is made. Failure to do this will leave you open to claims that may make you bankrupt!
Terms and Conditions
If you don’t spell out in black and white your terms and conditions of trade (T&Cs) you are giving you customers the licence to pay you when they feel like it. And if they go into liquidation before paying you, you may not be able to reclaim your goods if you do not have a Retention of Title clause in your Terms & Conditions. Draft some suitable Terms & Conditions for your business and ask a solicitor to check them. You must ensure your customer agrees to them, and ideally, signs them when placing an order.
If you keep any information about individuals you may need to notify the Data Protection Commissioner. It is not expensive (approximately £35 per year) and very simple to do. However, it is a criminal offence to break the law on data protection. If you are caught, you face a fine of £5,000 plus costs in a Magistrate’s Court, or an unlimited fine in the High Court. Contact your local government who will be able to guide you in the right direction to obtaining the relevant information.
Read the Small Print
Read all loan and overdraft agreements carefully to ensure you understand what you are letting yourself in for. Be very wary of signing personal guarantees. Banks often seek to over secure’ their lending. Once you have signed any paperwork you will be legally bound to any terms and conditions that are set out in the small print, no matter how unreasonable they may be. It is imperative that you read all small print before signing anything.
Be careful when signing lease agreements, especially for property. Even if you move and sell the lease on, you could find yourself liable if the next person defaults. Check whether you will be liable to repair and improve the property under the terms of your lease.
Avoiding the legal pitfalls will help ensure that smooth running of your business and will also prevent you from receiving any unwelcome fines.
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