Legal Hurdles For Start Ups

Starting a business is a dream come true for many people. After years of plotting and planning the official launch is exciting but you need to pay attention to some legal basics so your fairytale doesn’t turn into a financial nightmare.

Let’s face it, most entrepreneurs are ideas people and in the start up phase they are very cost conscious. All too often the legal risks work their way to the bottom of the priorities pile. However, the consequences can be catastrophic and in this article we will examine the four key areas of legal risk for most business start-ups and how to deal with them.

1. Contract Riskis a major legal risk for business start-ups and it is common for start-up entrepreneurs to agree to many written and oral contracts without really thinking about the long term consequences. Ideally, legal counsel should be sought beforehand because these contracts and agreements often cause angst down the track when the business is sold, pivots or even shuts down. If legal costs are an issue, try to include a cancellation clause in the contract with a short period of notice to minimise your contract risk. Beware of looking for a ‘band aid’ solution and the best way to manage your risk is to work with a contract lawyer.

2. Regulatory Risk- Heavily regulated industries such as finance, education or chemicals present regulatory risk management issues. Most commonly, the CEO’s of start-up companies are also directors of the company so regulation compliance is critical because the directors of companies can, in certain circumstances, be liable for criminal penalties if the company breaches certain regulations. This is particularly the case in the finance industry. Seek specialist legal assistance when setting up a business in a heavily regulated industry.

3. Human Resources Risk- Start-up businesses are not immune to HR issues. The most common HR issue would be recruitment and termination of employees but you may also need to deal with redundancies, allegations of discrimination, bullying and salary discrepancies within the workplace. Providing employees with a handbook and making sure it is adhered to at all times can alleviate some of this risk. Additionally, employees must be employed under the correct arrangements, whether award or non-award. Fair Work Australia sets out minimum rates of pay and benefits for employees. Breaches can attract heavy penalties under the Fair Work Act. Disputes between co-owners of a business are not an employee/employer relationship, so they would generally be dealt with in the companies’ shareholders agreement.

4. Environmental Risk- Potential environmental risks must be considered, especially if you are involved in the agricultural, chemical or water industries. If this applies it would be best to seek assistance from a sector specialist, consultant or lawyer on set up.

In conclusion, the risks are real for business start-ups who often get legal advice as a last resort. Financial constraints, ignorance or inexperience are not an excuse and business owners need to take responsibility to manage the risk. There is no substitute for professional advice but you can minimise costs by being vigilant and using some common sense and on-line resources.

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IMPORTANT DISCLAIMER:This newsletter is issued as a guide to clients and for their private information. This newsletter does not constitute advice. Clients should not act solely on the basis of the material contained in this newsletter. Items herein are general comments only and do not convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of these areas.