Legal Considerations for Startups HEADER

Legal Considerations for Startups

When you start a business there are some legal questions that need to be paid attention to. We all know that it is important to be aware of the tax laws and follow those, but what else is there?

Setting up a new business comes with many new questions, and the best thing to do is to create a simple step-by-step plan and stick to it. Once things become more complicated on your route, then it is advisable to consult with a legal advisor. 

Legal Considerations for Startups TEXT

To be or not to be – an entity

It is currently popular for new ventures to register as entities because there is a perception that this is the only way to protect the entrepreneur’s personal assets. It is important to consider, though, that there are many other ways to achieve this, and some of them are easier and less expensive than setting up an entity. Usually, it is less expensive to start as a sole owner or a partnership, rather than incurring legal costs and registering a company, only to discover that you didn’t need it. Closing a company can also be complicated and brings a number of unforeseen expenses.

For instance, did you know that you can get insurance specifically to protect your personal assets? This protects you against the risk of business failure. One advantage of this kind of insurance is that the insurer will ask multiple questions about the nature of your business, the risks involved and the measures in place to mitigate that risk. This forces the new owner to consider all of these factors before even starting and it is a useful process for a startup to go through.  

Setting up a company usually involves spending money, wherever you are. The main reason to set up your own company would be at the point where your individual tax is becoming higher than the tax you would pay as a company. An entity of course is also a good way to protect shareholders or investors’ money. Here a legal contract would give everyone a sound idea of what is involved, who is responsible for what, and how the investments are protected. 

One person who you should talk to is a good tax expert, who could then advise on various aspects of entities versus tax benefits. The legal aspect of company registration is often so simple that you can do it without a lawyer. You can perhaps use a paralegal or other consultant, who could have a look at the initial stage, discuss the company, what potential liability does exist, and what the dangers are. 

It is probably worth going for such advice every two-three years to make sure that everything is still correct. This is especially important if you are planning to scale up, as it is sometimes easier for someone from the outside to see in which direction the business trend is going.  

Creating contracts

Another key consideration is the creation of client contracts, which is where many startups go wrong. They go online and find a contract, copy it, and then cut and paste it to produce something they think is sensible.

There are two problems with this. One, the contract may not be suitable for their actual business sector. Two, often people cut out paragraphs they do not understand or think they do not need – only to discover that these were essential, such as a section about non-severability or severability, which can make or break a dispute.  

There are two other recommendations you should consider as well.

  1. Chat to someone who is a small business advisor and get their input into your situation. 
  2. Join a sector organisation, as they frequently have excellent templates and other resources.

Often, contracts use language that the professionals understand but this may not be so clear to laypeople. Plain language is a good way to design contracts meaning that your contract should be readable by an ordinary person and be understandable. One way to do this is to have a separate, plainly worded document that defines any of the terms or conditions that may not be understood by either party to the contract. 

When setting up a contract, certain elements must be clearly set-out within. These are the most important elements of a business contract:

  1. Who is contracting, 
  2. What is being done for the money, 
  3. How much money is involved;  
  4. When it is paid and
  5. Who is responsible for what, if things go wrong.

It should also state what falls within the contract and what does not before the work commences. This avoids the problem where the client feels an item falls within the scope and the person providing the service feels like it does not. Confusion like this can sometimes leave parties dissatisfied.

Payment issues

Setting up invoicing, payment reminders, and collections systems is critical. These systems can be automated to reduce the stress on entrepreneurs. 

Taking on large contracts for government or big clients often requires more than just the image of brave entrepreneurs who start their own businesses and put their reputation on the line. Having clear invoices and payment options allows the clients of your business to pay easily and ensure that you keep them on as a client. 

This will allow all communication between the startup and their client to be more official and payments will be taken more seriously. 

Running a business comes with many risks, but ensuring that all legal steps are followed will make the process a bit easier. It will ensure that your business is strong legally and that there is no confusion when it comes to signing contracts. It is best to always keep your side as clean as possible. 

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