Aside from the quite frankly ludicrous and peculiar legal problems that only occur once in a blue moon, there are very common mishaps that can strike at any time – and they do. Here are my top five most common legal pitfalls for the small business:
1. Employment issues
Lots of SMEs take on new staff but without bothering with formal procedures like drafting robust contracts. This can create needless uncertainties around pay, benefits, term and duties. Both foolish and foolhardy, this also makes unclear the responsibilities concerning legal obligations around pensions, data, and grievance procedures, as well as rendering the issue of dismissal rights rather murky. In short, it’s a recipe for disaster.
2. Partnership issues
A number of small businesses are founded by friends and family, or colleagues from another business setting. In scenarios such as these, where people already know each other well, it is tempting to not bother validating the small print of partnership agreements. But regardless of the nature of your business, failure to set these things out clearly at the start can cause lots of heartache down the line. You must make crystal clear who controls what, and everyone’s responsibilities, rewards and exit rights.
3. Intellectual property disputes
SMEs undervalue protecting intellectual property, seeing it as too expensive, a waste of their time, and too difficult to enforce. This is an illusion. Copyright (for example, in software) does not need to be registered at all – merely produced in physical form – written down) and asserted with proper use of a “c” notice. Likewise, a UK or European trademark is not expensive to register. Patents are certainly more complicated and more expensive, but even an application for a patent can give investors reassurance and at least deter potential infringers.
4. Funding problems
Once again, a cavalier attitude to formalities is a no-no, especially if your company’s investors are family or friends, or the investment deal disproportionately favors professionals (angel investors or banks, for example.) Arguments and a loss of control of your business can ensue, the business could be massively diluted, and provisions made could make future investment much harder.
5. Contracts that go wrong
At last you have a client or a customer – a cause for celebration if ever there was one! Think a handshake will do, or an email exchange to form the agreement? Often this is not enough. A simple email will miss out detail on payment calculations, payment dates, allowable deductions, obligations to sort out things that go wrong, as well as termination rights. Legislating for these hazards in advance is far more prudent than when you are in the middle of an argument and not thinking clearly.
As the old adage goes – fail to prepare, and prepare to fail. While it’s easy to get caught up in the heady buzz of starting a new business venture, spotting the flaws in your plan early on is crucial. Particularly if a date with a mother in law is at stake.