Many of the laws that relate to business are designed to protect customers, employees and the public. But they can also protect your business.
In this episode
In this 30-minute episode of Essential Business Radio, first broadcast in 2012 but still very relevant, Matthew Searle, founder of Adams and Remers LLP (now with GunnerCooke), Penina Shepherd founder of Acumen Business Law, and Philip Towler partner at Dehns, discuss your business and the law. Listen now:
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Introducing today’s guests
Julie Stanford: Hello. This is Julie Stanford of Essential Business Radio. A while ago, I presented a show called Business as Usual in Brighton, and a number of those shows are still really relevant for you today. Many of the laws that relate to business are designed to protect customers, employees, and the public, but they can also protect your business. In this episode, I’m joined by business legal experts Penina Shepherd, Philip Towler, and Matthew Searle, and we’re talking about your business and the law.
Welcome to the three of you. As a business owner, the thing that has kept me awake at night, more than meeting sales needs and looking after my employees, has been that notion of, “Am I trading fully legally? Am I doing this properly? What don’t I know that might be going on that’s really quite scary?” That’s the reason I’ve invited the three of you in today, so that anyone listening isn’t going to lie awake at night worrying about whether they’re doing the right thing, because I’m going to be asking you to help us think more about what the business owner needs to know to be comfortable that they’re doing it properly and legally. No pressure on the three of you, but that’s why I invited you here, because so many business owners, they live in a state possibly either of worry or of blissful ignorance.
Protecting your assets
When I did the Essential Business Guide first of all, as I was gathering all the information for the legal section, I was typing this up in my first edition thinking, “Oh, crikey, I didn’t know this.” It was just ignorance. I didn’t know that I needed to know that. First thing I really would like to ask you is, let’s think from the very beginning, when a person has this great idea for a product or a service and they want to set up a business, what do they need to think about at that very first stage? Obviously, some listeners will have already done that, or maybe there are things that they should’ve done and haven’t, but what do they need to be thinking about first of all?
Actually, I’m thinking, Philip, maybe if I just ask you, given that sometimes a business grows from that idea of the product or the service, what should they be thinking about before they even set up the legal entity of their business?
Philip Towler: Protecting their so-called intellectual property, their idea, is obviously something they ought to be thinking about at quite an early stage, I would say. It depends on the nature of the idea. For example, if you’ve just come up with what you think is a great name for your business, then you’d want to be thinking about protecting it as a trademark. One thing to be aware of, of course, is that somebody else might already have thought of the name before and therefore they may have protected it, so you may not be free to use it. Always important to check whether or not the mark’s in use. You can to some extent search those things yourself online. For example, the UK IPO [Intellectual Property Office] has a database that’s quite user friendly now and you can check for identical names. You may find it more difficult to check for similar names, because even using a similar name to one that’s registered can be an infringement in certain circumstances, so maybe take a little bit of professional advice on that score.
If your intellectual property includes, for example, a new process or a new product that you think might be protectable as an invention, then the most important thing for you to remember is that you must not disclose that to anybody out of confidence before you’ve gone and got some professional advice about it. A patent attorney should be able to tell you, certainly, if something’s definitely not protectable. For example, it might be a method of doing business which in the UK at least, and in Europe, wouldn’t be protectable. Some methods of doing business might be protectable in the US, for example. If there’s a possibility that the invention could be protected, then you’ll definitely need to seek some advice, because then you’ll need to file a patent application for it.
Julie Stanford: We’ll talk more about that next week, because I know it’s such a big issue that we probably need much more in-depth information. That’s the first thing to think about, do you need to protect the thing you’re going to be doing? Then, thinking about setting up the business, I was going to ask about the legal aspect, the legal form of the business. Penina, if someone comes to you and says, “Right, I want to set up my business. Should I be a sole trader? Should I be a limited company?” how would you advise them?
Sole trader, partnership or limited company?
Penina Shepherd: Often, the decision as to which legal vehicle to use when setting up a business, the decision is often driven by tax considerations rather than legal considerations. At least two points to mention here. One, is it one person on their own who’s about to go into business, or is it two or more, which will make a difference? For example, if it’s more than one person and they don’t set up as a limited company, they are regarded in law as partners. If there isn’t a partnership agreement between them, they will be subject to the Partnership Act, 1890, which my recommendation would be that they shouldn’t be, because it’s a very old act, obviously, and most modern businesses wouldn’t like to be governed by the provisions of this act.
If they are to operate as a partnership, after speaking to their accountant from a tax perspective, it’s, say, for example, better to start with as partnership, make sure they draw up a partnership agreement between them. However, if the recommendation it is that they do set up a limited company, then there are shareholders in that company. There is the memorandum and articles of association, which is changing as we speak, but these are the governing documents of a company. However, these are public documents. Any of us can go into the Companies House website and get a copy of them. If they want to have a contractual arrangements between them that is not open to the public, they need to enter into a shareholder’s agreement, again that will deal with a raft of issues that are very important.
The only legal point to consider whether they should be partners or a limited company, or even a sole trader or a limited company for one person because you can also set up a one-person company that will own a hundred percent of the shares, is to do with limited liability. If you act as a sole trader, you are personally liable for all the commitment, financially or contractual commitment that you make for the business. If you don’t honour them whoever it is on the other side can go after you personally, and that means your house, your car, any assets you may have. If you are a limited company, there are exceptional circumstances whereby the court would lift the corporate veil to see the people behind, and one most common such circumstance is if there is fraud. Then the court will lift the corporate veil and look at the person behind there and go after them personally.
Julie Stanford: Matthew, if someone came to you and they were setting up a limited company, what would you advise them as directors about their duties and their responsibilities, because that’s becoming more onerous now, isn’t it? It’s changing.
Matthew Searle: Yes.
Julie Stanford: I know it’s getting slightly scarier, I think, as a director.
‘All reasonable steps’
Matthew Searle: Yes, I fully understand. It is getting worse, not least because of the increasing litigation culture that we’re enjoying in this country, perhaps coming over from the States. Just to top up Penina’s excellent comments on limited liability, one of the duties of a director obviously of a limited company is to file its accounts, and those are therefore available to the public, which perhaps is the quid pro quo in return for limited liability. The directors’ duties, it’s a very complex and rather dry subject so I won’t give you the detail of the law, but just to try and sum it up as briefly as I can, as soon as you become a director you have these automatic statutory duties, of which there are many, but in a nutshell you have to, as of yesterday, the 1st of October , promote the interests of the company, having regard to the shareholders as a whole. That is really just common sense, but it’s as well to bear that in mind.
Perhaps the most important thing to add to that, especially in these rather more difficult economic times we’re having at the moment, that if and when the company gets into a situation of possible insolvency, then that duty changes and the director has to have regard to the interests of the creditors as a whole, which obviously is a slightly different concern. He could be made, as Penina suggested earlier, personally liable for debts of the company to creditors if he has failed to take all reasonable steps to minimise losses to creditors after he’s realised, or should have realised, that the company couldn’t avoid going bust. There is the possibility of personal liability for directors despite the starting point, which is that you’re not personally liable, you have the benefit of limited liability.
Julie Stanford: It’s that lovely term ‘all reasonable steps,’ isn’t it? Because that seems to me to be the woolliest phrase. It’s completely, it seems on the face of it, to be down to someone’s perception of reasonable.
Matthew Searle: Yeah, absolutely right. There’s the old lawyer’s phrase, ‘reasonable’, isn’t it? What I would say effectively is, as a director, certainly in this circumstances of possible insolvency of your company, this is what I would say to my clients, assuming it’s a male director, “When you’re shaving in the morning and you look yourself in the mirror, and if you conclude that ‘actually, my company is not going to see us through, we’re going down,’ then effectively you shouldn’t incur credit. You should stop trading.” That’s what it boils down to.
Julie Stanford: Also, running a business there are times when the cash flow isn’t flowing, but you know that you’ve got reason to believe that you will have future contracts. In that case, it would be a reasonable decision to make to keep going.
Matthew Searle: Exactly.
Julie Stanford: You would work hard not to incur debts, really.
Matthew Searle: Yeah. Well, strictly speaking, if you think you’re going to get through and you think you’re going to be able to pay off your debts in a reasonable time, then you don’t have to stop trading and you don’t have to minimise the amount of credit you’re incurring, but, yeah, you’ve got to be certain.
Julie Stanford: It is a fine line, isn’t it, and it’s one people, listeners, need to be aware of, really. Sometimes I think that directors of limited companies think they are fully free of liability, and of course that’s not true.
Matthew Searle: That’s not true.
Julie Stanford: I think we’re just underpinning that …
Matthew Searle: We are.
Julie Stanford: … to flag that up as something that people need to be aware of.
Matthew Searle: Yes.
Julie Stanford: Without scaring everybody.
Matthew Searle: I don’t want to scare them, because, this may change in the future, but at the moment any action against a director to get cash out of him or her for the shortfall to creditors will be driven by the government or its relevant department, and they haven’t got much in the way of funds to pursue these actions. So far, very few have been brought, and the ones that have been brought have been against the real rogues rather than bona fide business people who just happen to have got it wrong.
Getting the name right
Julie Stanford: That’s very interesting, and it is something to be thinking about. Before we just move away from this the setting up the business and how should we do it, I just wanted to back, Philip, just to one thing. You touched upon the name, which is such an important aspect of the business. Are there any words that you can’t use in a name? Am I right in thinking that you can’t use things like ‘loyal’ … ‘Loyal’? You can use ‘loyal.’ ‘Royal,’ just one letter, it’s so important, or ‘national’ or words like that without having them agreed? Is that right or am I making it up?
Philip Towler: There are one or two restricted names that you won’t be able to register, at least. I’m not familiar with rules on use as a company name. I have to defer to my colleagues on that.
Julie Stanford: Sorry, I’ve put you on the spot. I do apologise.
Philip Towler: One thing particularly with 2012 coming up to be aware of is that it’s very difficult to try and associate yourself with the Olympic games in any way without falling foul of the London Olympic Games Organising Committee. There’s been a special law passed basically to protect official sponsors, effectively, from having their investment downgraded, so don’t try and get on their coat-tails and try and associate yourself with the games unless you are an official sponsor, is what I would say. You can’t use the word ‘Olympic’ really in relation to virtually any goods or services unless you have some official status.
Julie Stanford: That means then that the many, many suppliers who might be supplying to the Olympics or having something to do with that, if they’re not official sponsors they’ve got to keep it a secret.
Philip Towler: I don’t know about that.
Julie Stanford: No?
Philip Towler: It’s a question of how you present it. You can’t use ‘Olympic’ as a trademark in relation to your services.
Julie Stanford: Right. Okay, so it’s actually a specific trademark.
Philip Towler: Yeah.
Julie Stanford: That’s interesting. I didn’t know about that. Now it just makes me I’m not going to be providing any the equipment to the Olympics. I doubt it. My javelins aren’t what they were. Let’s move on then. Thinking about another area where I know that businesses get it wrong, because I include myself in this as well, documentation. I know that earlier before we came on air, Penina, you were saying that let’s split it between internal and external, so maybe if you could tell us about the internal documentation needed for business, then possibly I could ask Matthew to talk about the external. We’re setting up a business. What do we need to think about in terms of the internal workings of the business?
Getting the right legal documents in place
Penina Shepherd: When I said internal documents, what I meant by that, these are the legal documents that govern the relationship between the business and its own people.
Julie Stanford: Right, okay. We touched upon it slightly with the partnership agreement or the …
Penina Shepherd: Yes, they are sort of also people of the business, but the most obvious group of such people, if you like, are employees.
Julie Stanford: Right, okay. I get you.
Penina Shepherd: So if your business employs employees, then the law requires the employees to enter into ‘written particulars’ is the language that the law uses, which is a posh word for employment contract, although it doesn’t have to be a contract as you and I define it, but it has to be in writing to set out all the employment rights and obligations in writing, and in which case I say to my clients, “Well, if you’re going to do that, you might as well have a proper employment contract in place.”
Julie Stanford: May I just ask you one question before you carry on? If someone didn’t do that, what would happen? There must be thousands of businesses who haven’t done that.
Penina Shepherd: That’s a breach. The only time it will come back and bite you is if the employee goes to a tribunal. Then you will be penalised for not having written particulars, because this is the right of the employee under the law.
Julie Stanford: Okay, so it’s important. It’s very important.
Penina Shepherd: It is very important. It’s very important obviously not to be in breach of the act, but it’s also it makes good business sense to have employment contract, because it is a relationship, and just like everything … Sometimes clients say to me, “Oh, I’ve got two employees, they’re like my best friends.” I will say to them, “Well, look at a couple on their wedding day. You wouldn’t think anything could possibly go wrong.” It doesn’t always go wrong…
Julie Stanford: But it can.
Penina Shepherd: …but sometimes it does, and then, however, five years down the line, they’re absolutely killing each other. In that case, it is important to have the employment contracts. They make good business sense, as well as that you have to do this under the act. Then, obviously there is the staff handbook, which basically should have all the policies to do with disciplinary procedures, grievance procedures. You can have a staff handbook which is a hundred page long or a few pages long. It can have things like internet policy, smoking policy, and so forth. Again, the important tip to say in this context is to make sure that the staff handbook doesn’t form part of the employment contract, that it is separate to it, because a contract can only be changed if both parties agree to it.
If you and I enter into a contract that I have to pay within thirty days and we agree that I have to pay you now within fifty days, that’s fine. As long as we both agree, there’s no one in breach. However, if just unilaterally just one person changes the contract, then that’s a breach of contract. Policies change all the time, so you don’t want the staff handbook to be part of the contract…
Julie Stanford: Oh, I see.
Penina Shepherd: …because you would need to employees’ approval every time you want to change it.
Julie Stanford: That’s a really big, important point to be making.
Penina Shepherd: That’s right.
Julie Stanford: Because that’s the last thing you’d want to do.
Working with freelancers
Penina Shepherd: Make sure they’re kept separate, yes. I suppose the only other group of people which I would include under the internal documentation, if you like, are freelancers. The freelancers and employees are a similar group of people because they both provide services to the business. However, they are completely different creatures when it comes to the law. Employees are governed by employment law, obviously. Freelancers are governed by general contract law, and there are very important issues that need to be covered by a freelancers agreement that, again, many businesses can overlook because they think, “Oh, that person is not my employee, I don’t need a contract.” No, you don’t need a contract in law, but, again, I would recommend to have a contract. It just makes good business sense.
Julie Stanford: It’s wise to have that. Do you mind if I just bring Philip in? Just there’s one point I was thinking there, Penina, what you said about freelancers. Many, many businesses, more probably now than ever before, use freelancers. What happens about the rights to the work they do, Philip? Say for instance I use a designer who designs a logo for me and it’s something I use throughout my business, who would own the rights to that?
Philip Towler: Generally speaking, the designer will be the first owner of the rights. Just because you’ve commissioned it from them doesn’t mean that you own the rights at all. There may be certain circumstances where the relationship between you might be construed by a court as giving you some rights in the IP concerned, but always the advice is get it in writing, have a contract between you so that you know exactly where you stand. Get the IP assigned to you as the business owner is generally the advice I would give.
Julie Stanford: See, that’s another really important point that I am sure there must be so many businesses who haven’t thought about that.
Philip Towler: That’s right.
Julie Stanford: They’ve got this wonderful logo or piece of work that has been created, and they haven’t protected their rights to it. That’s great, Philip. Thanks for that. Just going back then to think about the documentation, Penina, was there anything else about the internal documentation before I just go over to Matthew to talk about the external docs?
Penina Shepherd: I think for the purpose of this conversation that’s probably sufficient, yes.
Julie Stanford: I do you realise, the three of you, that we’re touching on the surface here…
Penina Shepherd: That’s right.
Final tips to take away
Julie Stanford: …and that really I’m asking you to condense years of knowledge and experience into almost sound bites. Forgive me, it’s the nature of what we’re doing. We’ve only got a short time together. I think that really the more I hear you talk, the more I realise how wise it is of me to have a solicitor. Matthew, could you just talk a bit about the documentation to do with our external relationships?
Matthew Searle: Yeah, happily. The first thing, just to add to Philip’s excellent summary of the law in terms of making sure you have a contract in place with your freelancers so that you own or have a proper license to use the intellectual property they created for you, I remember three years ago selling a business for a client, and the night before we were scrabbling around going back to some of his freelancers trying to get them to sign intellectual property assignments so that we could go up to Manchester the next day and sign all the sale documentation.
Julie Stanford: Did they realise the power of their position, the freelancers?
Matthew Searle: It was one of the best jobs I’ve ever done. Going on to the external contracts. Just to summarise, I mean… there’s so much to say. The first thing I’d say is that I, again, never cease to be amazed by how many of my clients say to me, “Well, there isn’t a contract because it’s not in writing.” Well, that’s rubbish. It’s not true. There is a contract if there’s a contract, if there’s an agreement between you and the external party. It doesn’t have to be in writing. Obviously, you’ve got to approve the terms of the contract, but there will be a contract. Remember that. Secondly, I think everyone’s aware now, but contracts can be formed by e-mail now. Judges will recognise and accept that contracts can be formed by e-mail and other electronic means.
I suppose your main and one of your earliest considerations setting up a business, your relationships with the outside world, is that you’ll need some terms and conditions of business that will regulate the rights between you and your customers. Very important document. Don’t just copy somebody else’s. Not only will that possibly be a copyright infringement, but also what’s right for their business might not necessarily be right for your business. The best terms and conditions, and what I try to do when I’m helping my clients get them right, is what problems do you have in practice? There’s lots of standard clauses in there, but the really useful clauses are the ones where you have a particular type of situation or dispute or issue that comes up all the time. Get it in your terms and conditions and address it into the shape that you need it to be in.
The other key area with terms and conditions is what lawyers call incorporation, which is basically making sure your terms and conditions actually apply to the contract, to the purchase by the customer. Again, it’s a very long, complicated area, but basically when the contract’s made, your customers have got to be aware of your terms and conditions. Otherwise, they’re not going to apply to them. The classic case involves someone in a hotel. Couple checked in at hotel reception desk and the contract was made then. They went up to the room. There was a sign on the wall saying, “You leave baggage in these rooms at your own risk.” They went out for the evening, got back, and their baggage had been stolen, so they went down to complain.
The hotel manager said, “Well, I’m sorry, there’s a sign on the wall. We’re not liable.” The courts said, “No. When they made the contract at the reception desk, they weren’t aware of a sign on the wall.” I think that illustrates well. The point is that when the contract is made, and you may have to train your sales staff, your telesales staff, the customer’s got to know your, have seen your terms and conditions and should have accepted them. Otherwise, those terms and conditions aren’t going to apply to the contract. Again, the number of times clients come to me, “Oh, it’s fine. It’s all covered in our terms and conditions.” I ask, “Was the customer aware?” “No.”
Julie Stanford: “We hid them in the back of the drawer.” Do you know, it’s a minefield.
Matthew Searle: Don’t put them on back of your invoice. That’s the classic mistake, because it’s too late. The contract was made when the sale was made.
Julie Stanford: Right. Do you know, we’re coming to the … Every time we start this part of the show, it feels like it’s a long time, and then we get talking about a subject and I realise it isn’t, so I might well be asking you back. I think maybe some of what we need to talk about next week can be covered then as we carry on with your business and the law. Penina, yes? You just wanted to make a point before I just … a final closing point?
Penina Shepherd: I just really wanted to support Matthew’s point about the specifics of terms and conditions and about copying and pasting other people’s. I had a very interesting example of a client of ours who were builders. I was actually quite impressed, they did have terms and conditions in place, which really impressed me. However, they had no cancellation provisions at all. There was a couple who live in a flat locally who contacted them for a really big, big job. They took the whole of August dedicated just to do their flat. They’ve already incurred some expense in buying some materials. They lined up sub-contractors. Other people came to them and said, “Well, could you do some work for us?” They said, “No, we’re to busy.”
Literally two days before they were supposed to start … It’s interesting that both the husband and the wife were both solicitors, and I could just see them sitting on the sofa, reading the terms and conditions, and going, “Whoopee, no cancellation provisions.” They just cancelled the job two days before. Every set of terms of conditions have their own specifics, and it’s so important. Sometimes it’s not so much what’s in there, but what’s not in there that can prove an issue later on.
Julie Stanford: Thanks. Do you know, it’s a minefield, isn’t it? We are at the end at this point of the show, and it may well be if at any point the three of you think, “Do you know, I wish we could’ve mentioned that?” we’ll pick it up again next week. It may well be that some of this flows over to next week. It’s such a big subject. I always like to end the show with just a quick thought or an idea or tip to leave listeners with. Philip, anything about trademarks and patents and anything that you think listeners should really remember?
Philip Towler: I think I’ll choose patents for this question, Julie. I think the scenario that I do occasionally hear as a patent attorney is someone will phone me up and tell me they’ve got this great idea for some widget that works, does whatever. I’ll say, “So, did you tell anyone about it?” and they’re saying, “Oh, yes, I told all my mates down the pub, and they all thought it was fantastic, too.” Unfortunately, once you’ve disclosed these ideas out of confidence, you won’t be able to protect them, probably, with a patent. If you get an idea, keep it secret. Don’t tell it to anyone except your nearest and dearest, and tell them it’s a secret, and then go and see a professional.
Julie Stanford: Okay, that’s a good thought. Penina, what would you like listeners to be aware of?
Penina Shepherd: The only thought I had when you asked that question is really what I would like to say to the business people out there, have business acumen. Think about what you’re good at. You started a business providing services or selling products, and that’s what you’re good at. Concentrate on that. Just as Philip said, you can go to a professional to get advice, some just very quickly, just in a one-hour session. There’s a lot of professionals out there that would do a free consultation, so just have a one-hour session to understand what is it that you need to have. In a way, a bit like our programme now, but have a conversation specifically about your business, and then let the professional get on with the documentation and you get on with running the business.
Julie Stanford: Which is good advice. Matthew, the last thought from you?
Matthew Searle: Thank you. I agree with what Penina says there. The point is that common sense, apply common sense as a director, and you won’t go too far wrong. Decent behavior in business and a bit of common sense will be enough, but your lawyer should alert you to where the pitfalls are if you let him or her know what your business is about and what you’re doing. The last thing really is to say, as well as contracts and intellectual property law, I mainly do buying and selling businesses, and selling businesses is a complicated issue. As a business, you want to tie up all the loose ends. You want to clear out all the skeletons in the cupboard before you undertake the actual process of sale, because those things will allow the buyer to negotiate down the price. Start two or three years out. Start doing your housekeeping, get the business absolutely water tight, and that way you’ll get the maximum price.
Julie Stanford: Excellent. This show was originally recorded for Business as Usual on Radio Reverb. I’m Julie Stanford. Thank you for listening to Essential Business Radio.