From sole trader to company, here is a guide to protecting your business future as you evolve.
Being sued is often a sign of success. It means you have something that someone else wants and, therefore, it should be something you work hard to protect from the outset.
As a lawyer who primarily acts in contested litigation, I wish I could turn back the clock and advise my clients to set up their affairs in a way that protects their business and their ideas and limits their personal exposure.
One of the most common and more damaging mistakes I see small-business owners make is that they do not seek sound and tailored legal advice early in their business’ life cycle. Good legal advice is quite often seen as something only to be sought when things go wrong, instead of as a valuable and necessary ingredient in a small business’ planning, success and growth potential.
I discuss a few of the more common issues that end up on my desk in this article. Without the correct planning and sound legal advice, the various pitfalls that business owners can encounter can be detrimental, or even fatal, to the business and its intellectual property in the long term, so we will delve into how to avoid them, and what to expect.
Think long-term about structure
A lot of small businesses start out as a sole trader under their personal ABN or as a business partnership. If your business starts to experience a high level of growth, however, and you want to hire employees and invest in it or attract investment, an alternative structure is probably more suitable.
Sole traders, partnerships, companies and trusts all operate differently and have their own advantages and disadvantages.
“Ensuring that you are entering into appropriate contracts with third parties, including suppliers and customers, is important.”
You may decide, for example, that setting up a company is the best option going forward – to seek to limit personal liability and exposure, for one thing. Of course, once you are a director of a company, you owe duties at law and it is important that directors are informed as to those duties, and how to discharge them.
For companies, ensuring the business has the appropriate structures in place may be the difference between being attractive to potential investors and looking unimpressive. Investors search for companies that have a coherent plan and structure. Ensuring a company constitution is in place that governs the management of the company, as well as a shareholder’s agreement with the company’s shareholders, is critical. When rights, entitlement and obligations are clearly defined, there is less room for dispute.
The process of becoming a company has its costs, and legal fees most likely sit at the bottom of the priority list for many business owners; however, when these basic legal structures are not properly considered at the outset, the costs are almost guaranteed to balloon exponentially, whether it’s in weeks, months or years later, due to the issues and growing pains that will inevitably arise.
Protect Intellectual Property
One of the most important aspects of expanding your business is protecting its intellectual property (IP). Anything can happen in a business, especially one experiencing the many trials and tribulations of growth. It should go without saying that investing in the registration and protection of IP – such as patents, trademarks and business names – should be high on the priority list and addressed at the outset of establishing a business.
The concerns go beyond registering your brand and patenting your inventions or research; employees and third-party contractors can leave and take your ideas elsewhere, so it is key to think ahead when it comes to protecting the business’ IP. Great ideas are worth protecting, and safeguards should be put into place to do just that. Legal assistance can help fortify IP, by setting up confidentiality and non-disclosure agreements with contractors and other stakeholders, among other things.
Employment contracts and restraints
Restraint of trade clauses in employment contracts are an essential protection measure for when employees move on from the business, to ensure they may not pass on information about the brand or valuable contacts that would be detrimental to your business’ interests. Restraint of trade clauses either take the form of:
- Non-competition clauses, which prevent employees from competing with their former employer for a set period and within a certain place following the cessation of their employment.
- Non-solicit/non-dealing clauses, which restrain a former employee from dealing with clients or employees of the former business for a set period following the cessation of their employment.
Restraint of trade clauses must be carefully drafted to be enforceable. They are only enforceable where the business has a legitimate interest and the restraint is no more than reasonable for the protection of that legitimate interest. If a dispute arises after the termination of employment, there is a risk that poorly drafted restraint clauses will be considered unenforceable by a court. Accordingly, it is strongly advised that business owners seek legal advice on the drafting of employment contracts that include these clauses.
Limiting who has access to your ideas or ‘secret herbs and spices’ is also critical. This is where appropriate workplace policies and safeguards around the protection of IP within your business come into play.
Contracts with third parties
Ensuring that you are entering into appropriate contracts with third parties, including suppliers and customers, is important.
Cash is king. Ensuring you have clear payment terms, a contractual entitlement to claim interest for breaches of payment terms, and personal guarantees from directors of companies with whom you contract, are all relevant considerations.
Responding to a dispute
Know when to hand over to the experts.
Often, even when a dispute arises, businesses are hesitant to incur the costs of obtaining legal advice early on in the dispute.
This can often lead to the parties engaging in open correspondence, which may later be used in legal proceedings against their interests. Likewise, it can result in the settlements of disputes that do not fully contemplate the parties’ rights and entitlements in the event that settlement is not honoured.
Ensuring that appropriate insurance is in place is another relevant consideration – including appropriate directors and officers insurance if you are a company.
This story first appeared in issue 41 of the Inside Small Business quarterly magazine
