Barely legal

By Jonathan Snade on November 5th, 2012

So, you have a great business idea, you know there’s a market for what you have to offer, you have a business plan and you even have an eye-catching name, possibly something created by adding ‘-r’ to the end of a word. What next?

Next comes the paperwork. Here’s a list of things you really, really ought to do when setting up your business. I’ve drawn them together from the most common enquiries I get from start-up entrepreneurs.

Incorporate a company

By incorporating your company you can protect your business name (no-one else will be able to register a company with the same name in the UK after this) and limit your liability to the amount of the share capital paid up. It is not possible to “reserve” a company name in the UK so you do have to go the whole way and incorporate a company to be sure of getting the name you want.

It’s worth speaking to accountants or tax advisers before incorporating your vehicle, particularly if you are planning to seek SEIS or other tax reliefs as this may impact on the way in which the company’s share capital is allocated on “day one”.

Funding the company

Once your company is up and running you will need to consider how its short-term needs are going to be funded. Whether this be by bootstrapping, or from friends, family, angel investors or other sources, it is imperative that legal advice is sought prior to funds being received, in order to avoid pitfalls which can be costly to rectify.

There are several issues to consider, mostly of a tax nature, around the price paid for the shares by incoming investors and shareholders, and around how those shares are acquired (by subscription or by transfer from the subscriber shareholder).

In addition, there is some technical paperwork which will inevitably be required: board minutes, shareholder resolutions, company forms, share certificated and updating the company’s statutory registers, all of which it is preferable to leave to your lawyer to draft to ensure everything is correct. It will save time and costs in the long run.

Founder documentation

In parallel to the above, it is prudent, where there are several shareholders holding a stake in the venture, to put in place short but comprehensive shareholder agreements and/or new articles of association of the company.

This will deal with issues such as decision making, share vesting, anti-dilution, information rights, restrictive covenants and share transfer restrictions. Again, it is worth the investment of time and costs in well-drafted founder documentation so that everyone knows where they stand from the outset.

Registering your IP

If your venture has domain names, trade marks, patents or other registrable IP then it should be registered in the name of the company. Speak to your lawyers or IP attorneys on this. If IP relevant to the business is registered in your name or that of another individual, this IP should be transferred to the company under a “deed of assignment”.

This is a relatively simple document, but one which your lawyer should prepare to get right. Your lawyer will also be able to advise if, for example, it is possible for IP to be transferred to the company as part of the investment in the company, instead of a cash payment being made.

Company letterhead and other ‘trading disclosures’

There are several requirements under English law for companies in terms of the information you will need to have, for example, on your company’s letterhead, outside of your registered office, on your emails, orders, cheques and invoices.

The law often covers not just the information itself but the way in which it is presented (for example, it must be in clear text and legible to the naked eye). It is important to speak to a lawyer to get these details right, not just for reputational reasons, but also to avoid fines.

Engage employees and consultants

This is another area where you will need input from lawyers. While many “off the shelf” employment and consultancy agreements can be obtained from the web, employment law is an area which is subject to particularly swift change so you can find your templates out of date and unfit for purpose.

You need to be particularly careful when seeking to engage consultants, as you may inadvertently find that an employment relationship has been documented, in which case the worker will have enhanced employment rights and the company may be exposed to backdated PAYE and NIC deductions.

In addition, speak to your lawyers on how to run a legally compliant recruitment process, to avoid direct and indirect discrimination claims from applicants. If looking to engage overseas workers then again you should speak to your lawyers for guidance on visa entry requirements.

Website compliance

As above, your website must contain specified information about the company as a matter of law. However, in addition, there are legal issues to consider concerning terms and conditions, avoiding infringement of third party IPR, consumer privacy, cookies and payment terms. Consult a lawyer as these are complex and changeable areas.

Sign NDAs

As mentioned in my last article for The Kernel, it can be worth consulting your lawyer on NDAs or confidentiality agreements with third parties to have comfort on their robustness and fitness for purpose. (That article aims to explain some of the basics to get right.)

VAT registration

Speak to your accountants about this, although there is useful information available online to help you determine whether you need to do it at all.

Be and remain organised

Looking ahead, if your aim is to attract more significant funding in the future from institutional investors (venture capital and private equity investors), or to exit to a trade buyer, then the golden rule to follow must be to remain organised and keep copies of all documentation relevant to the business in an ordered fashion.

Having these records close to hand will greatly assist any potential investor or purchaser in their due diligence exercise and will not only make a positive impression to such parties but will speed up the transaction process, keeping legal costs as low as possible and assisting to reach a successful transaction completion.

Jonathan Snade is a Senior Associate at Pinsent Masons