8 common legal and compliance mistakes that startups make


         When starting a business there are so many different things to think about that it’s only natural that something will get lost in the shuffle. From employing staff to protecting your company’s IP there are many avenues in which to get lost. At Geniac, we work with early stage businesses on a daily basis. We’ve found that it’s the same few processes, tasks and bits of information that seem to elude new startup founders time after time. As it’s our mission to help people build better businesses, we compiled this list of the most common and recurring legal and compliance mistakes that startups make. And for good measure we’ll offer up tips on how you can avoid them. After all - we like to help.

What to do about it: Knowledge is power. The first and foremost weapon to battle mistakes is information. Do your research and learn as much as you can about running a business. There are numerous resources out there to gather pertinent information from, and if you’re a little pressed for time don’t be afraid to ask for advice from other entrepreneurs and business services like us.


Choosing the wrong company structure

Before a business even starts trading it must be formed. The type of company structure that you choose should be decided based upon how many people will be forming the company, the expected revenue and the industry it’s in. Some structures suit some types of business better than others so it is important to think about where the business may go in the future. For instance registering as sole trader is very easy with very little paperwork or time needed to complete it. However being a sole trader does not protect you from any liability and you will held responsible for any debt the business should incur. If you’re planning on doing work for other businesses it may be worth registering as a limited liability company as some enterprises prefer working with those.

What to do about it: Examine the type of business you intend to create and go with the structure that will best suit your businesses needs. If you’re not sure there are many online resources that can help you decide which is right for you.


Not keeping a proper PSC (persons with significant control) register

Not a  common mistake yet since the PSC register has not been around for very long but since June 2016 the UK government has changed its regulations and no longer requires a business to submit an annual return. Instead each company must keep a record of persons with significant control over the business and submit it as part of a Confirmation Statement. These registers are mandatory and are a source of information for potential investors and the authorities should there be any allegations of money laundering.

What to do about it: You must assess all shareholders, directors or any decision maker with in your organisation by the criteria provided by the UK government and submit the PSC as part of your confirmation statement in lieu of your annual return.


Not getting proper insurance

Many new entrepreneurs think they don’t need insurance for their business in the early  stages.  This is not just irresponsible but dangerous. Not having insurance could put your whole organisation at risk should anything go wrong, and if running a startup has taught us anything it’s that things do go wrong. It’s best to be prepared. The type of insurance you will need will vary depending on the type of business you’re running. However there are some that all businesses should have such as: employer and public liability insurance and office insurance. More specifically some businesses may need cyber liability insurance and key man insurance.

What to do about it: There are inexpensive packages that small businesses can get that will cover most basic insurance needs plus a little personal and travel insurance coverage. However, you may need other types of coverage depending on your business so it’s best to seek advice.


Not registering with the Information Commissioner's Office

This one is hardly surprising since many of the businesses we work with had never even heard of the ICO let alone known that they must register with it. If your business is collecting and storing information about customers and/or employees (and it probably is) then you must let the ICO know.  You also need to have a data protection policy detailing how this information is being stored, what it’s used for and how long it will be kept. With the government’s new regulations, the GDPR (General Data Protection Regulation), the fines associated with failing to comply can reach up to £500,000! Plus cyber liability insurance is only valid if you are registered with the ICO - so any trouble you encounter could be twice as bad if you don’t.

What to do about it: Make sure you have someone on your team that is responsible for the security of data and information and creating the policies that go along with it. Check to see if you have already registered at the ICO and if not get on it immediately!


Nonexistent or poorly written employment contracts

If you’re a new business owner then you may not have a lot of experience with creating certain legal documents like employee contracts. It is very common for startups to employ people they already know and trust like their friends and former colleagues, however this is no reason to skip on the formalities. Not having proper employment contracts can lead to a number of issues -  not to mention the fact that it’s illegal. All people working for your company, whether they are permanent or temporary need to have signed a contract within two months of their start date.

What to do about it: create employee contracts that detail hourly wage, sickness and holiday allowance, job description, terms of notice and expected work hours. The contract should also make reference to where employees can find the details of other policies relating to their employment. Which brings us to...


Forgetting about the policies

The need for employee policies tie in with the importance of employee contracts however they are separate (but both necessary). Some policies are statutory (e.g. sickness and grievance policies) while others just best practice (such as dress or social media policy) but it’s always best to have all the bases covered. Not having clear and established policies opens up the door to a number of scenarios you don’t want to deal with; from wrongful dismissal claims to data breaches. With the correct policies in place you’ll be better protected against these and have a framework from which to work if something does go wrong.

What to do about it: Employee handbooks are a great way to keep all these policies in one place. While the handbooks themselves are not mandatory, some of the policies within them are, so you might as well go ahead and get one made.


Thinking their website doesn’t need terms and conditions

Brexit campaigners loved talking about all the red tape that came along with being part of the EU with the dreaded terms and conditions and privacy policies being major talking points. While the future of these regulations are uncertain they are still the law, (at least for now).  If you are entering into any kind of contract on the internet, such as selling a product or service online, then your site must have terms and conditions and a privacy policy. Failing to do so can lead to fines and disputes should anything go wrong.

What to do about it: These policies can be very simple to set up. If you don’t need anything other than a basic agreement and policy then you can find generic templates online and customise them yourself. If you’re not sure about what kind of terms and conditions or privacy policy your website needs don’t hesitate to ask for advice.


Not setting proper business contracts or terms on invoices

Whether you’re buying or selling goods or services there will inevitably come a time when something goes wrong. If you don’t have the right agreements in place you have no fall-back. Late payments and bad debt are still some of the biggest issues plaguing startups in the UK with 62% of small business owners saying that they experience problems with late payments and about one third citing it as the the single largest cause of cashflow problems. Do your agreements cover payment terms? 27% of SMEs said they had to write off debt last year due to non-payment with the average write-off amounting to £11,829.

What to do about it: Make sure your business contracts are air tight, make sure they outline the work involved and what payment will be made when. Get them checked by a professional before using them.  Also make sure that the contract is agreed to and signed by both parties before beginning the work. And keep your paperwork! Read more about avoiding and resolving late payments here.

We can help you avoid school-boy errors and get your business in order. For a free business healthcheck from Geniac email enquiries@geniac.com or call us on 0203 696 8214.

by Katherine Green on August 25, 2016

Topics: startups, deep dive, legal, compliance, policies

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