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The 6 biggest legal mistakes startups make

It’s no exaggeration to say every start­up needs legal advice at some point. Why? Because case studies have shown that not getting a solicitor on board at the beginning can result not just in loss of profits or damage to your company’s reputation but much worse ­ how about criminal fines or illness for starters?

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As a legal comparison site we see lots of requests for legal help from UK startups. In our experience, the following are the most common legal mistakes startups make.

1. Failing to have a Shareholder or Partnership Agreement

Friends commonly go into business together – despite the warnings from other friends and family. They’re both so enthusiastic about the business and on such good terms at the outset that the idea of falling out seems ridiculous. But a year down the line reality sets in and one of you wants out. But there’s no legal piece of paper there outlining what the drill is…

Do you split any profits?

How much should the remaining owner pay for the deserting owner’s shares?

A Shareholder Agreement (for limited Companies) or a Partnership Agreement (for partnerships) can be drawn up by a solicitor before you even start trading.

2. Not getting Intellectual Property protection

You’ve probably heard the term intellectual property (IP) before. It commonly comes up in the design and music industries but it applies to all creative endeavours. A registered trademark, patent, copyright and design rights are aimed at preventing a third party stealing your work/ideas by copying and reproducing them.

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It sounds ridiculously cheeky but it’s not uncommon for a company to receive a legal letter from a company which may have copied their idea/work, claiming infringement of their intellectual property. Or maybe the letter is genuine and the start­up didn’t realise an incredibly similar idea was already in production. This can always be checked by getting an IP lawyer to run a check to make sure protection is in place.

3. Not paying enough attention to contracts

Another surprisingly common legal mistake. Busy new companies often don’t realise how unfavourable to them the contract with their supplier is, for example. Not, that is, until a dispute arises and the other party refuses to pay up. This is when you kick yourself for not ‘reading the small print.’

Contracts are legally binding and if a small business owner has signed one in haste then he or she may very well pay for it later. A solicitor can draw up a contract to protect against late payment, non-payment of business debts or being forced to accept faulty/replacement goods or services.

4. Having poor Employment Contracts

Sometimes business isn’t going well and it’s necessary to get rid of a member of staff – or cut their hours ­ in order for the company to survive. Or maybe you’d like to change their role, perhaps even get them to move to another location for work? Be warned – doing so may considerably alter their contract of employment and leave the business open to court action by the employee.

Employment Law ensures businesses must treat employees fairly and follow strict procedures. A good employment contract can include terms allowing businesses to make necessary changes and making it easier to dismiss employees who are under­performing.

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5. Not negotiating favourable Lease Terms

If a start­up isn’t operating from the owner’s back bedroom (and, let’s face it, many do) then chances are they’ve signed up to a business lease. Again, like the third bullet point in our list, commercial leases can be tricky when it comes to the small print.

Negotiating favourable lease terms can ensure your business isn’t being charged extortionate service charges, paying out a fortune due to repair and decorating clauses and is protected against anti social behaviour by other tenants.

6. Unwittingly or accidentally breaching sector specific regulations

Depending on which sector your business is in, you may be required to comply with specific regulations such as only being allowed to practice when you gain a qualification ­ we’re thinking law and finance services here in particular, but also education and health care such as dentistry or podiatry etc.

Breaching such a legal regulation could prove incredibly costly. Not only could you be fined and ordered to stop practicing immediately, but your reputation would take a huge hit. And worst case scenario – you could end up spending a period behind bars!

This article has originally written for ByteStart by LawSpark