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Legal Issues for Startups

Thursday, 12 September 2013

Venturing into small business is becoming an increasingly popular endeavour for individuals.

Budding entrepreneurs should be aware that there are many legal obligations that come along with starting a business which they need to incorporate into their business planning.

Startup Legal Structure

Before even considering a physical location, it is important to decide the legal structure of the business. There are three primary structures: a sole trader, a limited incorporation or a partnership. Each structure offers benefits as well as risks and thus calls for careful consideration at the outset.

For example, the appeal and ease of setting up as a sole trader might well be offset by the corresponding increased personal risk and liability.

Contractual Issues

After selecting a structure, several contractual issues will come into play. Most important will be the contracts governing the relationship of the founders, this might entail simple contractual arrangements, partnership agreements, shareholder agreements and employment contracts.

Another major contractual arrangement is related to selecting a physical location for your business. A lease should include terms allowing early break if necessary and provide other protections specific to a startup business.

Other contractual matters may revolve around financing of the business; startup capital may be sought via loans or equity investment.

Contracts used in the trading operations of a business can be detailed and legally complex so the firm’s standard terms should be drafted by a solicitor and more complex contracts should be reviewed on an individual basis to ensure the best possible terms.

Permits and Licencing

Depending on the industry, a business might need an appropriate license to operate. This is especially true for industries dealing with the public or with hazardous materials, where permits are generally required. Furthermore, the owner of a business has a duty of care towards any person affected by business operations and has the responsibility to implement reasonably practical mitigation measures in respect of any dangers.

This duty of care can spread quite broadly; it is not limited to the immediate premises and can cover employees, visitors, and even the general public if their health and safety is affected by the business.

Business Insurance

Business insurance can help to protect a business owner from various forms of liability. If there are any employees, employers’ liability insurance is legally required. Current employment legislation dictates employee treatment, such as working hours, and reviewing and complying with these regulations is crucial.

Additional insurance, such as professional indemnity or public liability insurance can prevent a financial disaster if any compensation becomes due in the event of an accident or other claims.

Taxes and VAT Registration

Taxes due will vary depending on the legal structure, but many startup business owners may not realise a business must be VAT registered if annual turnover is more than the registration threshold; currently £68,000 per year.

Voluntary VAT registration is allowed if a business projects annual turnover will exceed the threshold, and this approach may be advisable in order to avoid significant financial penalties for failure to register in a timely manner.


While the legal burdens may seem overwhelming, launching a business in consultation with a solicitor can help to ensure compliance and avoid expensive mistakes. For more information please contact James Crichton via e-mail or by telephone on 0207 611 4848.