Setting up your own business can be a daunting prospect. There is so much to do and so little time to do it in and naturally, the focus will always be on getting the work finished, manufacturing your product and/ or selling to customers.
Clearly a business will not survive without this but all of that effort can be a waste of time if, caught up in the day to day running of a business, simple things are overlooked or not considered that expose you to personal liabilities.
The consequences of failing to consider these matters can be serious. For example, a recent client was venturing into the beauty treatment business, undertaking botox and similar treatments. He acquired premises, did the necessary work on them, acquired equipment, hired staff and took out advertising to promote the business. It was open for three months before he took the decision that it was not going to work. Leaving aside the continuing liability under the lease he now owes over £200,000, with limited prospects of paying it back and the possibility of losing the family home.
There are a number of fairly simple steps that can be put in place to protect business people from this kind of personal liability or at least minimise any claim that comes along. Here are some suggestions as to how to limit risk. Not all will apply to everyone and some may need amending to take account of particular circumstances but for the most part, business owners should consider them carefully.
• Do your research. Be clear on whether there is a market for your business idea. Understand how much it is acceptable to charge and what it will cost you. Can you really make a good long term profit? Look at your financial projections and have a plan of what to do if business is not as brisk as anticipated. Know your breakeven point and how long it will realistically take to get there. Be clear on how you are going to survive until that point.
• Is the business adequately insured? This could include employers’ and occupiers’ liability insurance, sickness cover for you/ your employees and key man insurance for the business. The list is endless — some are essential and others are voluntary but without knowing which is which you cannot make an informed decision about what is needed.
• What business structure do you have/need? What are the risks involved for you or your family in running your business? It is a matter of assessing the likely risks and the consequences that flow from that risk. Limited companies or limited liability partnerships usually afford some protection but personal guarantees can often be required by lenders/landlords to go behind that protection. They can also offer some tax benefits in the right circumstances. Partnership or sole trader status does not provide this level of protection but can be beneficial and appropriate nevertheless.
• If you are in business with someone else then you may need a partnership, shareholders and/or directors agreement. This should cover matters such as illness, authority to bind the business, the level of funds that each will take out of the business and what other benefits will be provided by the business and at what level. It should cover the consequences of death, divorce and disagreements between the parties and how they will be resolved; including valuing the interest in the business if the parties go their separate ways.
• Always get proper legal advice before entering into any arrangements for property. There are often a number of hidden clauses in property documents. If you are entering into a lease then you need to know what your repair responsibilities are as the lease continues and at the end. What is the property’s condition now? How much is the service charge and what can it increase by? Understand exactly what the rent is, how often it increases and how that will be calculated.
• Have some terms of trading properly incorporated into your dealings with people including your dealings on the web. You should seek to restrict your liability if your product is being incorporated into something else further down the manufacturing chain. Also cover more basic things like when you are to get paid!
• Consider intellectual property matters, both in relation to your employees but also as regards your business colleagues, for example, if you are providing designs to others to manufacture for you.
• Have contracts of employment for employees dealing with what is expected of them, holidays, wages etc. but also dealing with restricting their activities whilst employed and when they leave. Are these sorts of things covered as they are between the business owners?
• Do you have a disaster recovery plan? Consider how the business would respond in the event of a power cut, computer crash, virus, flood or fire on the premises. How would the business continue in the event of your illness or that of a key member of staff?
This is by no means an exhaustive list but it does give a starting point to those embarking on a new business venture. There are many positives about starting up your own business and by considering the pitfalls carefully you can do your best to mitigate against potential problems further down the line.
Mark Gardner is a lawyer with Excello Law. He advises businesses on contentious matters, debt recovery and insolvency.