Legal Documents for Startups
"What legal documents do I need?" is probably not the first question that springs to mind when starting a new business And rightly so. Starting a new business presents a whole range of exciting possibilities and challenges. Having said that, thinking about some basic legal matters early on makes good business sense and can save startups from potentially expensive problems later on.
Business Structures for Startups
Possibly the first legal decision you should consider when starting a business is: "What business structure will I use?". The main structures to choose from are:
- sole trader
- limited liability company.
Each structure has its own pluses and minuses for startups. Apart from the differences in legal structure, there are also significant differences in tax structures. We won't go into the tax aspects here but it is an important consideration. There is a wealth of information available online from official government sites and business networks such as Enterprise Nation. Your accountant will also be able to help with information about which tax structures will be the most appropriate for your circumstances.
The simplest structure is sole trader. A sole trader owns and controls the business. The business is not a separate legal entity and the owner has unlimited liability for debts of the business. On the plus side, a sole trader is very easy and cheap to set up - no legal documents required. Startups can get up and running right away.
A partnership is a business owned by 2 or more people. It has a formal structure set out in a Deed of Partnership. Traditional partnerships have unlimited liability. Limited Liability Partnerships (LLPs) offer the safety of limited liability at the price of a bit more formality. LLPs must be registered with Companies House, must publish annual accounts and comply with Companies House rules on company administration.
So, the legal documents required for a partnership are a Deed of Partnership (or Partnership Agreement) and, in the case of LLPs, various Companies House documents.
Limited Liability Company
A limited liability company is a separate legal entity. It issues shares, has directors, can own assets and (most importantly) is liable for its own debts. If the company fails the investors can't lose anything other than their investment. This is a major benefit compared to operating as a sole trader.
Of course, the advantage of limited liability status comes with a more formal structure with a set of management practices and reporting requirements to satisfy. A Limited Liability Company must be registered with Companies House but, these days, it's quick and easy to do.
The two main documents you need to set up a limited liability company are a Memorandum of Association and Articles of Association. A company's Articles of Association set out the rules of how the company will be run. The Companies Act 2016 includes "model" (i.e. a basic set) of rules that a start up can use, or you can use the model articles as a start to create your own version.
These days, setting up a limited liability company can be done online. If you're happy to start out with the model Articles (they could be changed in the future as your company grows), then you can do it via the Companies House website for the princely sum of £12. It's very easy to do.
If you don't want to adopt the model articles then you can still register your company yourself, you will just need to submit paper copies of your Articles of Association, Memorandum of Association and IN01 form to Companies House.
Another approach is to buy an off-the-shelf company or use a registration agent to advise and do the work for you.
The key legal documents startups need to form their own limited liability company (unless setting up online with model articles) are:
- Memorandum of Association
- Articles of Association
- form IN01.
Selling to Customers
We've written before about the importance of written terms and conditions for businesses. If your business sells off-the-shelf goods in a bricks and mortar shop then presenting your customers with written T&Cs before each purchase would be just silly (and unworkable!). If, however, your startup offers goods or services that are unique to each customer - anything from carpet fitting to wedding marques - then having a good, clear set of written T&Cs is essential.
Legislation gives the seller and buyer many rights, regardless of whether or not others T&Cs exist. And you can't remove these rights. But there area wide range of other terms you may wish to include in the contract e.g.
- your returns policy
- guarantees or warranties over and above those provided for in law
- specific customer obligations e.g. a builder might specify that the client is responsible for redecorating.
Having all aspects of the contract with your customer clearly set out, up-front also helps avoid misunderstandings and evidence of what was agreed should a dispute ever arise.
So, another key legal document for startups:
- written Terms and Conditions of sale.
Employing staff for the first time is a big milestone for a growing business. There's lots to consider and new obligations and legal requirements to meet. A good starting point is the GOV.UK website.
If or, even, when your startup grows to the point that you want to employ staff, then your key legal contract will be a Contract of Employment. There are a whole range of other legal documents you may need (ranging from statutory forms to policies such as a sickness and absence policy) but the main one to help form good employer/employee relations from the start is the employment contract.
You are legally obliged to provide employees who have been working for a month with a 'written statement of employment particulars'. This covers the main particulars of the job. Many employers meet this obligation by including the employment particulars in an employment contract. The employment contract will cover the statutory requirements plus any additional terms that are part of the job.