So, You Want to Start a Business in 2024? Top Ten Legal Issues that You Have to be Aware of

So, You Want to Start a Business in 2024? Top Ten Legal Issues that You Have to be Aware of 

Many aspiring entrepreneurs desire to kick-start their businesses as soon as possible. However, while starting a business sounds exciting, there are a number of legal issues owners of small-medium enterprises have to look out for. In this article, we will take a look at the top ten commonly-made (or ignored) legal mistakes among SMEs. Meanwhile, to serve your business needs, we will also provide you with tailor-made DocPro templates to download and use.

 

Mistake 1: Absence of a Solid Operation Structure

For a lot of aspiring SMEs, businesses turn downhill when disputes or conflicts arise among business partners. Without an operating agreement that clarifies the roles and decision-making power of members in the company, it is difficult to ensure long-term harmonious working relationship, let alone a successful business.

 

An operating agreement is a legal document that outlines the rules and regulations for the operation of a limited liability company (LLC), as well as the rights and responsibilities of members (or business partners) in the company. It serves to set forth the path for the business to follow and clarify terms and conditions, bringing in certainty in operation and management. An operating agreement is typically a 10-20-page document, including essential components listed below:

 

• Formation of the Company, including the name, principal place of business, registered office, and term.
• Rights and Duties of the Managers, including their authority to make decisions and the limitations on their powers. The agreement should also include their tenure, resignation, and removal arrangements.
• Indemnification of the Managers
• Rights and Liabilities of Members of the Company
• Allocation of Profits and Losses, including distribution, accounting principles, and tax returns.
• Arrangements for Termination or Dissolution of the Company, including the distribution of assets and the filing of articles of dissolution.
• Meeting Arrangements, including annual and special meetings, quorum requirements, and voting procedures.

 

DOWNLOAD IN WORD OR PDF: Operating Agreement – Limited Liability Company

Ensure smooth operation of your LLC with our tailor-made Operating Agreement. It includes essential components as well as additional provisions to suit your business needs.

 

 

Mistake 2: Not Paying Enough Attention to Intellectual Property Issues

As indicated by Andrew Pickett, a lead Trial Attorney and founder of Andrew Pickett Law, failing to secure intellectual property exposes businesses to potential exploitation. 

 

During partnership with other businesses, SMEs may have to disclose their business strategies and other confidential information with their business partners. If not protected, sensitive business information may be disclosed to non-target third-parties or even the public against their interests. In such cases, contracts like non-disclosure agreements (NDAs) are needed to protect their intellectual property rights and the confidentiality of information.

 

The benefits of having an NDA are vast and extensive. In essence, it makes sure sensitive information regarding a company is kept confidential, so that the company’s interests are protected. Basic mutual NDAs include the following components:

 

• Confidentiality Obligations. This section should clearly state the parties’ obligations in protecting sensitive business information, including but not limited to prohibition of copying, reproducing, or storing any information.
• Confidentiality Measures. This section lists out the measures that each party must take to protect the information disclosed to them.
• Exceptions. Exceptions may be mentioned in the NDA if there is any information that can be exempted from non-disclosure clauses, for instance, information that both parties are indifferent to publication.
• Return of Information. This section includes the obligations of parties to return or destroy all materials containing sensitive business information and remove any stored information from, for example, computer systems.

 

DOWNLOAD IN WORD OR PDF: NDA/Confidentiality Agreements

Click on the link to view our NDA and Confidentiality Agreement templates. Having an NDA or a Confidentiality Agreement can surely add protection to your company’s valuable information and assets, as well as confidence to your partnership with other businesses.

 

 

Mistake 3: Lack of Proper Licenses and Permits

It is easy for SMEs to neglect to obtain the necessary licenses and permits required to operate legally in their industry or location. This may lead to legal consequences including fines, penalties, or even closure of the business.

 

Mistake 4: Inadequate Employment Practices

People are an essential component to the success of any aspiring SMEs. However, without a well-developed employment practice, it is difficult to attract talents to join the company. Even for existing employees, an inadequate employment practice may lead to high turnover rates and the company’s inability to keep long-term workers.

 

In this case, well-drafted employment contracts are necessary to ensure the rights and interests of employees are protected, so as to ensure their long-term commitment to the company. In a typical employment contract, the following provisions have to be included:

 

• Details about Employee’s Position, Duties, and Obligations
• Employment Period
• Working Hours
• Wages and Renumeration Package(s)
• Details about Leave the Employee is Entitled to
• Details about Probational Period
• Confidentiality Agreement
• Restrictive Covenants

 

For more information, visit our blog on Navigating the Fine Print: A Guide for Employees to Understanding Basic Employment Contracts.

 

According to Alex Freeburg, Managing Attorney and Founder of Freeburg Law, the misclassification of workers can have significant consequences, leading to expensive legal disputes and potential liabilities. Freeburg further emphasizes that if your business exercises control over various aspects of work, such as setting schedules, providing equipment, and overseeing day-to-day activities, it is a clear indication of an employer-employee relationship. Conversely, contractors usually enjoy more autonomy and independence in executing their tasks.

 

DOWNLOAD IN WORD OR PDF: Employment Contract/Joining Letter/Offer Letter

DocPro provides a range of templates on employment contracts, joining letters and offer letters for aspiring companies who want to push their businesses forward by recruiting more talents and skilled employees.

 

Mistake 5: Not Paying Enough Attention to Tax Considerations

SMEs need to pay attention to a variety of key tax issues related to their businesses. Without adequate or proper planning, it is easy for SMEs to find themselves liable for unintended or unanticipated taxes, fines, and penalties. These taxes can include income tax (where SMEs pay tax on their profits), sales tax (where SMEs collect and remit sales tax on their sales transactions), payroll taxes (where SMEs are required to withhold payroll taxes from their employees’ wages and remit them to the appropriate authorities), etc. 

 

To prevent unwanted legal consequences or unintended fines, any SME has to keep track of their taxes and report to relevant authorities whenever necessary. However, in case tax issues arise, it is important for the company to write a well-written letter to the tax office to explain the situation and negotiate an appropriate solution. Here at DocPro, we understand that writing to the tax office can seem daunting, therefore, we provide businesses with a set of template letters regarding different tax matters, including but not limited to missing information, error in tax assessments, tax penalties, and tax reductions.

 

DOWNLOAD IN WORD OR PDF: Letters to Tax/Inland Revenue Department

Writing a letter is one of the most effective ways of communicating with the tax office, and it serves as a good piece of evidence that a company has made efforts in raising the tax issue with the relevant tax authorities. Important points to include in a letter to the tax office include:

• Response to the Notice from the Tax Office
• Information about the Company’s Tax Situation (with Supporting Documents Attached)
• Request for Further Steps/Resolution/Appeal

 

Mistake 6: Not Looking for Early-Stage Legal Assistance

While a lot of entrepreneurs recognize the importance of legal compliance in starting a business, few actually do actively seek legal advice or legal assistance due to the cost of such services. Many believe they can navigate the complex legal requirements of various industries on their own, however, that can lead to significant legal challenges and even financial consequences. Though it is tempting to save cost from legal representation, it is actually important for SMEs to seek professional advice or help at the beginning of their business. Having an early counsel/lawyer would ensure smooth progress of one’s entrepreneurship.

 

Mistake 7: Inadequate Shareholders Agreements

Many small to medium businesses pursue growth by attracting private investments, usually through sale and purchase of private shares. However, some companies may neglect the importance of drafting a comprehensive agreement that encompasses the rights and responsibilities of both parties, thereby causing future conflicts and disputes. Any dispute or conflict with investors, needless to say, can be detrimental to one’s business.

 

Thus, it is important for SMEs to have an effective and well-drafted shareholders agreement with private investors. It can avoid disputes and provide legal protection for both the company and its shareholders. A shareholders agreement is usually concluded to (i) define the rights and responsibilities of both parties, and (ii) organize the management of the company. It allows shareholders to incorporate express contractual provisions addressing key management issues above and beyond those afforded by statute and corporate law, but the contract itself is not intended to govern the daily operations of a business.

 

DOWNLOAD IN WORD OR PDF: Shareholders Agreements

Here at DocPro, we offer templates of shareholders agreements of various nature, including but not limited to shareholders agreements for equal shareholdings, shareholders agreements for unequal shareholdings, and parental guarantees to other parties in relation to shareholders agreements.

 

Mistake 8: Not Separating Personal and Business Transactions

According to Ben Michael, Attorney at Michael & Associates, when small businesses are founded by friends or family members, they frequently overlook the importance of prioritizing contractual agreements. This oversight often results in legal complications down the road. Huge risks are posed if one does not draw a clear line between business and personal assets or funds. For example, one should never pay for his or her personal transactions using business funds.

 

To make sure such a line is clearly drawn, adequate record-keeping and avoiding the commingling of funds are essential practices. Meticulous documentation is necessary to keep track of any personal and business transactions, and make sure neither category crosses the line to affect the other. While it is possible to pay business expenses from personal accounts, legal rules and requirements have to be observed to safeguard the integrity of the business entity.

 

 

Mistake 9: Not Having a Well-drafted Service Agreement with Clients

Clients are a crucial factor to the growth of a business. However, it is also important for small to medium businesses to ensure that their interests are comprehensively protected during any service project. Otherwise, disputes may arise and the company may lose some of its valuable sources of profit.

 

To deal with this issue, a service agreement is necessary. It is a legal document outlining the scope of duties or services provided by the company to clients for renumeration. Key components include:

• Scope of services to be provided in the expectation of both parties
• Fees and payment terms
• Any refund policy
• Responsibilities of both parties
• Limitation of liability in case of third-party claim or other circumstances

• Term of the agreement
• Rights of the parties to terminate (or delay) the agreement
• Dispute resolution mechanism

As the business expands, consistent use of a service agreement with clients will not only make the contract management process more efficient, but also increase client’s confidence in the company’s credibility and reliability.

 

DOWNLOAD IN WORD OR PDF: Service Agreement --- Long Term (Neutral)

At DocPro, we provide templates for service agreements of a long-term, regular, and continuous nature. We also provide an agreement template drafted in favour of the company, i.e. service provider, in the following:

DOWNLOAD IN WORD OR PDF: Service Agreement --- Long Term (Provider)

 

Mistake 10: Not Having a Formal Contract for Renting Office Space

In early stages, businesses tend to do work from a home office. However, as the business grows, there will be increased manpower and a formal office space is needed to accommodate the employers. In this case, many small to medium enterprises may turn to rental commercial property or shared offices. Without a proper lease, not only does it violate certain government and legal rules, disputes may also arise when there are conflicts between the occupant and the landlord. Therefore, an effective and well-written lease agreement is needed.

 

Important terms and clauses to specify in the lease agreement include:

• Base rent and any additional charges/fees
• Security deposit
• Duration of the lease
• Responsibilities and rights for both parties, i.e. the tenant and the landlord
• Regulations on the improvements and upgrades the company is entitled to make
• Termination of the lease agreement

For more information on shared offices or renting co-working space, please visit our blog, Coworking Space: 5 Factors to Consider Before Signing a Lease. At DocPro, we also provide tailor-made lease agreement templates for SMEs to download and use. Click on the following links to learn more!

 

DOWLOAD IN WORD OR PDF: Lease Agreement Template (Commercial, Neutral)

DOWLOAD IN WORD OR PDF: Licence to Occupy (Commercial/Shared Office, Neutral)

 

Find the above information helpful? Visit our blog on The Top 10 Legal Documents Every Startup Needs to Secure Their Business to learn more!