Legal considerations

• Text size
•  
•  

There are some basic steps that every new business should take to ensure its best prospects for future success. Here are some of those key areas where legal considerations may benefit a new business venture.

Establishing the business
Legal advice should be sought on the best way to structure the business for not only its current needs, but also its future growth plans and any founder exit strategies. For example, in Oman there are a number of corporate forms under which a business can be conducted. Small businesses can be run through a corporate vehicle or through partnership. The risk with partn-erships is that the liability of the individual partners is unlimited.

For this reason, a company is most often formed to undertake a new business. The liability of a shareholder in a company is limited to the amount the shareholder has invested as share capital.

Agreements between the shareholders in a company or the partners in a business should also be considered at the time of establishment. This is particularly important where the parties bring different contributions to a business. For example, one party may contribute technical skills and knowhow and another financial supp-ort. A shareholders' or partnership agreement can record how each party will contribute to the business and what responsibilities, rewards and risks each will assume.

This has the effect of giving the business a monopoly right to exploit that invention for the duration of the patent. For some new businesses, a patented invention is its key asset, against which it can secure a market edge and raise finance.

All new businesses need to consider protection of their business secrets. This may be as fundamental as protecting the details of a business model and development plans. Often this type of information is disclosed to potential backers of the business when start-up funds are sought.

Before any such disclosure is made, howe-ver, the new business should seek written confidentiality undertakings from the recipient of their precious business secrets. Countless are the stories of new businesses disclosing hard-won plans and research to a potential backer only to find the backer using that information to start his own business. A simple confidentiality agreement could have prevented many of those abuses from occurring.

While there are obvious advantages from such an approach, the risks are also high. Contracts that are too onerous on a new business may erode any anticipated profit from the arrangement or leave the new business with unanticipated claims that it has no means of paying.

At the very least a new business should carefully review proposed contracts and consider whether it can accept the risk of things going wrong under the terms on offer. If possible, the contract should be amended to include terms limiting the business' liability as well as closing off many of those otherwise open-ended obligations.

Once a business is more established, it may consider introducing standard customer cont-racts and perhaps also supplier contracts. Again, such contracts can be used effectively to reduce the risks posed by a wayward supp-lier or a difficult customer.

Another important aspect of good contracting practice is its impact on the founder's prospects of selling the business at a later date. Prospective buyers of a business will look to see that the customers providing the major sources of revenue for a business are locked into a long-term contract.

The absence of customer contracts or poor contracts that provide little protection can have a direct impact on the price a buyer will pay for that business.

Employment laws
Employment laws impact on all new businesses. As employers, new businesses need to be aware of their liabilities that arise under law and their obligations toward their employees.

Employment law is one of those special areas of a business that is not just regulated by the contract the parties sign, but also by a raft of other laws designed to protect the financial security, health and safety of the employee.

New businesses need to ensure that they have employment contracts and workplace practices that comply with those laws and that will not give rise to employee claims. Sometimes entrepreneurial businesses seek to encourage or reward staff performance by offering share options. These schemes need to be carefully structured and documented to ensure that they remain relevant to the staff and that they do not become unduly burdensome over time.

Legal compliance
Whether or not the proposed business is permitted under law and what regulatory oversight applies to the business, may make or break a new business idea. Some areas of business are subject to heavy regulation.

For example, businesses operating in the area of financial services require approval from the Capital Market Authority (CMA) and may have to demonstrate certain technical competencies before that approval is granted. Some such businesses also have special rules requiring high levels of capital. Each of these matters may be a threshold issue, as to whether or not the new business is viable.

Prior to starting a new business it is therefore important to consider the laws that will apply to the type of business proposed. Every business will have some sort of applicable regulatory compliance. This may be as simple as obtaining the municipality approval for a signboard and filing annual tax returns, or it could be altogether more complex, as applies to those businesses operating in the area of financial services.

These regulatory issues should be identified early on to make sure they are factored into the business' cost model and business plans, and so that the new business does not breach the law by failing to observe these legal requirements.

The above areas are intended to provide some guidance on legal matters that should be considered in a new business venture. While sometimes the law can act to prohibit or restrict certain activities, it can also be a tool used to maximise a business advantage. Any new business would be well advised to consult a lawyer as a part of its planning preparations.

Advice to be sought on
Establishing the business
Protecting the assets
Contract and employment laws
Legal compliance.

By Charles Schofield

© businesstoday 2006