Understanding the most common mistakes small businesses and start-ups make
NAB has partnered with Sprintlaw to provide legal services for small businesses, offering a one year business legal helpline for $99.
Based off their experience, Sprintlaw have identified the most common legal mistakes that start-ups and small businesses make and offer their suggestions on how you can prevent them.
Forgetting to register a trademark
The most common mistake we see new businesses make is failing to register a trademark for their business or product names.
A trademark is a form of intellectual property that gives the owner certain exclusive rights to registered words, phrases, and logos. If you successfully register a trademark for a name, phrase, or logo, it means you can stop others from using it without your permission.
Trademark registrations are not all encompassing – they are limited by country, by ‘class’ (or industry) and can only be registered for a certain time (usually 10 years).
For example, Sprintlaw currently owns the trademark for the word ‘Sprintlaw’, in class 45. This is the ‘legal’ class, in Australia and several other countries. It means that nobody else can use the word Sprintlaw (or anything similar, like ‘Sprintlegal’ for example) to represent their goods or services in the legal industry in Australia or other countries, for the duration of our registration.
Trademarks are important. If you’re going to invest time, money, and effort in building your business and developing your brand, you should check that your brand name is available and, if possible, own it.
If you don’t, somebody else may have already registered a trademark and, without realising it, you could be committing trademark infringement. Alternatively, somebody else may come along with the same or similar name after you and secure the trademark, and then attempt to shut you down.
Sprintlaw have had many clients face liability and be forced to rebrand because of these issues. Usually, they could have been avoided if they’d simply thought about their trademarks from the beginning.
One very common misconception is that if you register a business name or make a company registration (which everybody does when they set up their business), you then own that name. This is not correct, and these registrations are not the same as trademarks.
Such registrations are more like an administrative or legal requirement, and they give you no ownership rights in the name of your business. The only benefit of these registrations is that it stops somebody else registering a business or company with the exact same name as you. Ultimately, it doesn’t stop somebody else using (or owning) the business or product name you have selected.
Trademark registrations take time. It can take more than 8 months to secure one in Australia, and even longer in some other countries.
Choosing the wrong business structure
When you’re setting up a business, you must select a business structure. The main options to choose from include sole trader, partnership, company, or a trust-based structure. Depending on the nature of your business you are conducting, there are other structure types you can consider too, such as not-for-profit or charity.
We see many mistakes made around business structure. The most common involves individuals opting to operate as sole traders or partnerships rather than companies, with the intention of saving money.
A sole trader is a simple, easy way for an individual to start providing commercial services – it is free, fast, and easy to DIY. Partnership structures are also similar, whereby several partners can jointly register as a partnership online for free.
These kinds of structures are mostly intended for small scale, low-risk operations. As a sole trader or partner, you’ll generally have personal liability for things that go wrong in your business. This means that if you make a mistake and cause a client financial or other loss, they could potentially sue you, and come after your personal assets like your personal savings, house, or car.
The company structure is a much safer way to operate a business and is the structure Sprintlaw recommends for basically any serious commercial operation. Specifically, Sprintlaw recommends the PTY LTD company structure, which is usually the correct type of company for start-ups and SMEs.
When you set up a PTY LTD company, you are effectively creating a new, fictional legal ‘person’ who will operate your business, own its assets, and make decisions. The company will have shareholders that act as owners of the company, as well as directors who control the decisions and actions of the company. These are often the same people in the early stage of the business, for example, the founders will be the shareholders and directors. However, other parties may become directors or shareholders as the company grows or receives investment.
Crucially, once a company is set up, the shareholders and directors of the company will benefit from limited liability. This means that clients or customers are unable to come after the personal assets of the company’s directors or shareholders, except in a few limited circumstances.
Start-up companies may benefit from more complex ‘multi-company’ structures, which sometimes involve utilising two or more companies, or holding shares in their company via a trust, which is another more complex type of business structure.
These structures usually require advanced legal and tax advice to get right but can provide significant additional benefits in enabling business owners to further protect their key assets (e.g., cash, intellectual property) from liability to customers, and to further reduce the personal liability of business owners.
Company structuring is a step that many businesses attempt to do themselves because they are eager to get started, and then leave it until it is too late to clean up. Doing it right from the start or as early as possible in your business journey is always better, because restructuring can take time and can become more of a headache the longer you leave it.
If you don’t, chances are you’ll wish you did. Many business owners and businesses lose out simply because they failed to get proper structuring advice early on.
Trying to ‘DIY’ critical legal documents
Another mistake businesses make is trying to ‘DIY’ their most important legal documents, using templates or online DIY legal software.
This is understandable, because lawyers are expensive, and legal risk management is not always at the top of founders’ minds. As a tech-powered legal firm, Sprintlaw does offer some DIY legal documents as part of our subscription to use in limited circumstances, and it can be more affordable for smaller companies.
However, attempting the self-service of important legal documents is very risky, and can cause more harm than good. To explain, there are many things that can go wrong when you try to DIY legal documents:
Using the wrong kind of legal document
Businesses commonly select the wrong kind of document for their circumstances. For example, terms and conditions documents for online businesses can vary greatly depending on whether the business is an eCommerce shop, a marketplace, a SaaS model, or a mobile application. Frequently, businesses download generic documentation that doesn’t always apply to their business model and provides no real risk protection. Essentially, there is no point to having them at all.
Using a document that hurts rather than helps
Legal documents are usually ‘balanced’ in one way or the other, in favour of the customer or the service provider. If you’re a service provider, you want to use a service-provider balanced document that limits your liability, reduces your risk, and secures your payment. If you’re a customer, you want a customer-balanced document that makes sure you can hold the service provider responsible for poor work, obtain refunds where necessary and potentially secures IP ownership in the work you’ve paid for. Businesses can use the wrong kind of document if they do it themselves – e.g., service providers using terms and conditions that increase their level of liability to customers instead of reducing it. This can be highly detrimental and can lead to enormous legal liability.
Breaching regulatory requirements
In your industry, there may be regulations requiring your legal documents to contain certain clauses or notices. In Australia, there are Australian Consumer Laws that are broad and apply to most smaller businesses in any industry. If your legal documents do not contain clauses required by these laws, or say things that these laws prohibit, you could face fines, penalties, or legal action. This is very common when businesses accidentally use foreign legal templates, or where they use generic legal documents that aren’t intended for their industry.
Not appropriately protecting against your business risks
When you’re using a DIY’d document, chances are it’s a generic template with limited customisation to your business. However, every business has its own unique kinds of risks specific to its business model. For example, if you provide a high-end cleaning service and you use a generic Service Agreement, the DIY’d agreement may not contain any clauses about liability for breakages that occur during cleaning. The role of a lawyer is to help identify these risks specific to your business and adjust template documents to cover and protect against the biggest risks specific to your business and your business model. Without these clauses, your agreement may provide limited, or no protection and you are still left vulnerable from a legal perspective.
In many cases, your legal documents are a representation of your business and how sophisticated you are. If you present a low-quality set of terms and conditions, with unusual clauses contained within it, customers may not take your business seriously, and it may hurt your ability to sell or grow your organisation. A professional, well-drafted set of legal agreements can help to grow your business and add to the overall positive impression you’d like to leave on clients or business associates.
When can you use DIY legal documents?
There may be some limited circumstances where doing it yourself is the right thing to do, but this does depend on the context and level of risk involved. Ultimately, it is a risk management decision for you. Generally, it’s probably always going to be better to have a lawyer draft your documents.
If in doubt, you should chat to a lawyer and work out what your business-critical risks are and what you should focus your legal budget on.
Since 2017, as a specialist legal firm for small and medium enterprise businesses, Sprintlaw has helped thousands of start-ups and small business clients with their legal needs. Through their experience, they have identified trends in the legal needs of Australian small businesses and the most common legal mistakes that smaller companies typically make.
Where can I get help?
Sprintlaw is currently offering a one-year business legal helpline for $99 to help support your business.
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