Start-up Fundamentals

Starting a new business is an exciting prospect. It can also be a challenging one, with a range of issues to be successfully navigated to enable you to fully exploit the opportunities arising from your new venture.

Our start-ups site highlights the fundamental legal issues you need to consider when starting your business. Managing these issues will ensure you have the right foundations in place for long-term growth and success, while mitigating risk. Everything we do is driven by a desire to make our clients successful, and we look forward to helping your business succeed.

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Your business structure will be driven by financial, as well as legal considerations, but the most conventional structures are:

  • Sole Trader
  • Partnership
  • Limited Liability Company

To ensure the potential for the business is maximised, the structure and operation of the business itself should be carefully planned alongside the core idea. Having a clear structure will make the business more attractive to investors and optimise its value.

In Northern Ireland the most common type of company is a Limited Liability Company (a private company limited by shares). The costs are low for incorporating this type of company, particularly when weighed against the potential benefits.

This structure is a simple way to protect personal assets – unlike a Sole Trader or Partnership, the Limited Liability Company does not put your personal assets at risk. A Limited Liability Company is a separate legal entity which will hold the business assets in its own right. Its liability is limited to the amount paid for shares in the company (often as little as £1.00 at the start).

A Limited Liability Company is a separate legal entity and is the owner of the business assets. It is a credible and trusted business structure which provides both continuity and flexibility for growth, making it attractive to potential investors.

Although relatively inexpensive to set up, there are ongoing administration requirements such as keeping a register of shareholders, and filing annual accounts and a confirmation statement with Companies House every year.

A company must also complete a Company Tax Return each year for HMRC. The directors of a company owe duties to the stakeholders, including a duty to act in the best interests of the company. We can advise on the extent of these duties, particularly if there are a number of company stakeholders.

 

Choosing a business name is a crucial branding element for your product or service.

The name you select will obviously be determined by what best fits your business, however, there are some legal factors which should inform your decision.

As a general rule, if someone in a similar field to yours is already using a particular business or organisation name, you should not use it, nor should you use a name that would be confusingly similar. Choose a name for your business that is distinctive, not one that is generic or similar to the name of another similar business. Consider protecting your chosen business name as a registered trade mark to protect it from infringement.

By law, if a business (Business A) has developed a reputation in connection with particular goods or services which it offers, then no other business (Business B) can represent that its goods and services are those of Business A. You need to be careful not to “pass off” your product or service in this way to avoid a potential claim. Similarly, you cannot use a logo or name which is similar to a registered trade mark, providing similar goods or services, without running the risk of a trade mark infringement claim.


Check for registered trade marks within the EU (which includes the UK and Ireland database) at the “EUIPO” website, https://euipo.europa.eu/eSearch/ and check whether another business is using your preferred name.

If using a company as your business structure, you cannot use the same or very similar name of a company already in existence. Current company names can be checked at https://beta.companieshouse.gov.uk/

 

Cash is key for any start-up business. Raising funds for a new venture can be overwhelming, but with an extensive support infrastructure in Northern Ireland, and the availability of an ever increasing choice of alternative funding options, there is more support than ever for start-up businesses. Some of the key types of funding for start-ups are set out below:

 

Grants

Businesses in Northern Ireland may attract the benefit of government grants aimed at helping new and existing businesses grow. Grant funding is the best form of funding for start-ups that are not keen to take on too much debt, or give away too much equity in the business, particularly at an early stage.

 

It is important for you to consider which grants are most appropriate for your business (the Gov.UK online grant resource, ‘Business Finance Support Finder’ (https://www.gov.uk/business-finance-support-finder/search) is a handy tool to help you start). Each grant application should be tailored with the particular grant funding requirements for that scheme in mind.

 

Loans

Bank or family loans are not the only funding options available to start-ups. Loans are available from many alternative sources, such as cash-rich individuals experienced in the industry, or loan funds, both of which could bring experience and guidance to the table, in addition to money.

This type of funding, known as debt funding, involves lenders lending the money to your business under a loan agreement. You will be legally bound to the contractual terms you sign up to, so it is important to check the terms of your agreement carefully. In particular, you should take care when signing any document that commits you to providing a personal guarantee (i.e. creating an individual liability) to your lender as security for your business.

Debt funding may require security to be put in place, either in the form of a floating charge over all the assets of the business, or a fixed charge over individual high-value assets. Any security will impose strict restrictions on how you can deal with such assets.

 

Alternative Debt Funding

Debt funding doesn’t have to be a simple loan of money with a set time for repayment.

Debt funding can be structured to suit the needs of the business such as invoice discounting, asset finance (for key assets such as machinery or vehicles) or trade finance. Business owners should take time to understand what best suits the needs of their business.

 

Investments

The term “Investment” is traditionally associated with raising money through the sale or issue of shares in the company (as seen on Dragons’ Den). This is known as equity finance and can include finance from, among others, venture capitalist firms, business angel investors and crowdfunding.

These investments involve giving investors shares in the company in exchange for cash. Investors will normally require all shareholders to enter into an investment agreement regulating the terms of their investment.

When taking in equity funding, consideration should be given to how much of a stake in the business to offer investors in return for their investment.

It is very important that there are synergies with the investors and they can bring value to the business beyond simply their cash investment, such as experience in the industry or business connections.

 

Crowdfunding

Crowdfunding is the process by which a number of people each invest in a business or idea in return for a share in the business (equity crowdfunding), a return on their investment (debt crowdfunding) or another benefit, such as a discount on products or services (reward crowdfunding).

Typically, a company seeking funds will set up a crowdfunding campaign through a crowdfunding platform and the campaign is then promoted through social media and other channels in order to attract investors.

 

If you are going into business with others (individuals or companies), it is important to have a written agreement which governs the relationship between you.

 

Partners/Shareholders

When more than one person is involved in the management of a business it is important to set out, in an agreement, how the business is to be managed and the rights of each partner or shareholder.

This agreement will set out, for example, how profits can be extracted by the partners or shareholders, and how major decisions are made. This agreement can also be crucial in limiting the damaging effects of any disputes by clearly setting out the means by which disputes should be resolved.

 

Customers and Suppliers

It is important to ensure you have a legally binding contract (a promise by A to fulfil an obligation to B in return for payment) to manage your relationship with suppliers.

With clear contract terms in place you can minimise disputes, protect your liability and confidential information, and specify when the relationship can be terminated.

A formal contract is a business asset, documenting the commitment of the customer or supplier for the length of the contract. This demonstrates clear value in the business for potential investors.

For ease and standardisation, it is worth putting in place standard terms and conditions (T&Cs) for customers and/or suppliers. You should also carefully review any T&Cs provided by a customer or supplier, in particular any triggers and processes for termination, and any surviving obligations and liability after termination – these will determine who is liable and for how much if things go wrong.

 

Employees

Different rights and responsibilities will apply depending upon the nature of the contractual relationship between you and those who work for your business:

 

Self Employed Consultant

A consultant provides services for its clients but is not an employee. Engaging a consultant may allow a business greater flexibility free from certain liabilities which govern an employment relationship. However, this flexibility should be for the benefit of both parties and employee obligations cannot be avoided if the relationship is not genuinely a consultancy arrangement.

Care should be taken with consultants to ensure the working relationship is confidential and ownership of any intellectual property developed by the consultant is owned by your company.

 

Worker

Workers are people who provide services personally, but who, for certain reasons, do not meet the definition of an employee. An example is an agency worker. These people have less extensive legal protection and rights than employees of a business.

 

Employee

Employees benefit from the most extensive statutory protections. Employee status is determined by considering a number of factors, including the degree of control exercised by the employer over the employee, and the requirements for the employer to provide work and for the employee to have to do that work.

An employer is obliged to PAYE (Pay As You Earn) and National Insurance Contributions (NICs) at source from the employee’s salary. Employers are required by law to give their employees a written statement of the main terms and conditions of employment within two months of their start date.

In addition to employment contracts some policies are required by law, such as those dealing with disciplinary and grievance procedures; other policies are practical in nature, such as absence management, equal opportunities, data protection, IT usage and social media use.

This is a complex legal area and expert advice should be obtained.

 

If all or part of a business lies in its intellectual property (IP), it will be particularly important to ensure there is clear evidence of its ownership or entitlement to use such IP. Any assignment of IP to the business should be properly documented in writing.

Most people are unaware that if they use a third party to create IP for them (for example, developing source code or creating a brand, logo or website), the third party will own any IP developed or created unless expressly agreed otherwise (even if you commissioned and paid for that IP).

It is vital that the terms around IP ownership and use are agreed upfront, and (preferably) recorded in a written agreement with that third party. Failure to do so may leave your business exposed.

In Northern Ireland, there are two main types of IP rights:

  • Registered
  • Unregistered

 

Unregistered Rights

Arise automatically, and include:

 

Copyright

Protects original artistic expressions such as literary, artistic works or software code. Copyright subsists for the author’s life and usually for 70 years after their death.

 

Unregistered Design Rights

Protects the appearance of a functional product based on certain designs for 10 years after products based on that design were first sold, or 15 years after the design was created, whichever is the lesser period.

 

Goodwill or “Unregistered Trade Marks”

Where a business has acquired “goodwill” in a brand from trading under that brand, it may have acquired unregistered trade mark rights.

 

Registered Rights

These are granted on application to an official body such as the UK Intellectual Property Office. Key registered rights include:

 

Patents

A registered patent grants the owner the right to exclude others from making, using, or selling an invention, industrially applicable process or device based on the patent for 20 years from the filing date.

 

Registered Trade Mark

A registered trade mark gives the owner the right to the exclusive use of the mark in connection with the goods or services for which it is registered. The same trade mark may be registered for different classes of goods or services.

 

Registered Designs

A registered design gives the owner the right to exclusive protection for its design, and can last for 25 years. The design is protected across all sectors and is not limited to the product to which it was originally applied.

Before you start filing for patents, trade marks and designs, it will be important for you to research what is already out there.

 

Any business operating in Northern Ireland and holding information from which living individuals can be identified will be subject to data protection legislation. This legislation regulates the collection, processing and disposal of personal data, and sets a higher standard of protection of sensitive personal data (for example, medical information).

Some of the key obligations under data protection legislation include:

 

Developing a Privacy Policy

Notifying customers, users of your website and others as to how you will obtain, record, hold, use, disclose and erase their personal data.

 

Drawing Up Employee Data Protection Policies

Providing the requisite information to employees through employee handbooks or employment contracts or a combination of both.

 

Pay a processing fee to the Information Commissioner’s Office or ICO

Unless you are exempt, all persons processing personal data need to pay a fee to the ICO. You can find out whether you are exempt by completing the ICO’s self-assessment checklist here https://ico.org.uk/for-organisations/data-protection-fee/self-assessment/

 

Breaches of data protection legislation may lead to a significant fine and adverse publicity.

 

It is important to establish an effective system for record keeping and the filing of key documentation from the very beginning. Good practices in relation to maintaining records will pay dividends in the event of a potential investment.

An investor will carry out due diligence on your business, for example, to review shareholding, ownership of assets and key contracts, so having this information in good order and readily available will present a positive impression to potential investors. It will also reduce the amount of time required to manage an investment, which could distract from the development of the business.

It is important to record accurately any investment of your own private funds into your business, which will impact issues such as tax and the ability to withdraw funds.

Set up a Business Bank Account for your business once it starts trading, keeping a clear distinction between your personal finances and the finances of the business. This will help facilitate payments and allow you to keep track of profits and losses. It will also assist in the preparation of accounts and financial reporting.

There are HMRC requirements for businesses, whether operating as a sole trader, partnership or company. Specialist tax advice should be sought to ensure that the business is compliant.

 

Certain insurances are legally mandatory or required by funders. The more common insurance policies are:

 

Employers’ Liability Insurance

If you employ staff, your business is required to take out employers’ liability insurance with an authorised insurer for all employees, and, potentially, workers providing services to it as well.

 

Property Insurance

If you operate from a commercial property or even your home, property insurance for business use should be obtained.

 

Public Liability Insurance

This insurance protects your business from claims brought by any member of the public should your business (including you or any of your employees) accidentally injure themselves or damage their property while working with you or on your premises.

 

Product Liability Insurance

If your business provides a product this type of insurance is essential, as it should cover you for injury to a member of the public, or damage to their property, caused by the product that has been supplied, installed, maintained, or manufactured by you.

 

Professional Indemnity Insurance

If your business includes the provision of services, professional indemnity insurance protects your business from mistakes that may be made in providing those services or advice to your customers, who have suffered a loss as a result.

This is not an exhaustive list of insurance requirements and specialist advice should be taken from an insurance broker.

 

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Disclaimer
While care has been taken in the preparation of the content of all pages of this guide, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.

It is a condition of Tughans in allowing free access to this guide and the information container therein that you accept that Tughans will not be liable for any action taken in reliance on the information in this guide.

Unless otherwise stated, all content in this guide is copyright of Tughans 2019.