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Legal Pitfalls your Growing SME Should Avoid

Senior Counsel Richard Larking discusses the legal pitfalls every growing SME should avoid.

The precise definition of an SME may differ depending upon the business person, journalist, politician or tax inspector you’re speaking to, but one thing which isn’t up for debate is the vital role which SMEs play in the wider United Kingdom economy. According to figures collected in 2014, SMEs make up over 99% of all private sector businesses in the UK, employing over 14 million people and generating a collective turnover of £1.6 trillion. One thing which all of these SMEs have in common, no matter how large or small they are and the particular field within which they work, is that they encounter legal issues of varying complexity on a day to day basis.

Many SME owners may feel that this is an exaggeration, viewing ‘legal issues’ as strictly those problems which result in time spent in court, solicitors’ letters being exchanged, injunctions taken out and the other obvious signifiers of involvement in the world of legal provision. The truth of the matter, however, is that virtually every action undertaken by an SME has legal implications, from taking on a member of staff to signing a contract to rent premises and offering goods for sale vie their web site. Thanks to a reluctance to sanction what they might view as the additional expense of seeking regular legal advice, many SME owners make small but telling mistakes in the initial stages of a process such as those listed above, only to see the implications of this mistake snowball and become hugely expensive when the full ramifications make themselves felt. A study of 10,000 businesses carried out by the Legal Services Board uncovered the hidden cost to SMEs of legal issues which hadn’t been addressed. The study found that 23% of SMEs reported a significant loss of income, 12% reported an increase in costs and 9% had experienced reputational damage. In some cases the problems were even more extreme, with 6% of businesses reporting that they’d had to lose members of staff or even close down altogether. To summarise, 46% of SMEs reported an adverse impact on their business brought about by a failure to address legal issues, with the average cost to the business being £13,812.

In many of the cases, the report found that people running businesses tended to turn to friends or colleagues for advice, not realising that the problem they were dealing with in fact required legal expertise, or perhaps not even noticing that there was a problem at all.

The legal issues faced by any SME change as the business changes and grows and, whilst every business is unique, there are particular areas and situations which people running SMEs are more likely to find themselves dealing with on a day to day basis.

The initial setting up of an SME, and in particular the formulation of any contracts and agreements between business partners is something which has to be handled with due care and diligence. A well-structured and clearly drafted agreement will provide not only a firm foundation upon which to build the business but also a useful reference point if any disagreements arise further down the line. All too often SMEs rely on informal arrangements, sealed with a handshake and perhaps a quickly drafted document, which proves to be of little use when differences arise. The cost of accessing legal help in drawing up the initial agreements will be miniscule when compared to the cost of fighting a legal battle over ownership further down the line.

As your business begins to grow and you need to take on more staff you’ll find yourself dealing with the hugely complex legal thicket that is employment law. All aspects of recruitment, from the drafting of a job advertisement and the interview process, through the contract of employment and, if need be, the circumstances around having to fire a member of staff, are covered by a plethora of different legislative acts, and making a mistake could prove hugely costly. If you find yourself undertaking illegal employment practices, even inadvertently, the cost, both financial and reputational, could be huge. Handle the employment or dismissal of an individual in a manner which doesn’t comply with law, what’s more, and you might find your business on the receiving end of a costly compensation claim. Legal advice when setting up your HR structures will help to prevent problems of this type arising and, if a mistake has been made, employment law experts will be able to minimise both the cost and the time spent dealing with it.

Another area in which legal advice is vital is the field of intellectual property. Your business name, logo and other features need to be protected as securely as any more tangible assets. Indeed, the innovation you offer, the ideas you present and the identity of your SME could be said to be the most valuable assets in your possession. Allowing them to be diluted because you haven’t taken the legal steps necessary to truly protect them could be a disaster for your business, as could needing to launch a claim against a business rival encroaching upon your intellectual territory.

As your business grows and prospers (greatly aided by the legal advice and help you’ve sought), there’s every chance you’ll want to reward loyal and hardworking staff, and sharing the equity in the business is an ideal means of doing so. Staff and management rewarded with a stake in the business will feel invested in a manner which will ensure a willingness to go the extra mile. The right legal advice will enable you to structure incentives such as these in a manner which is not only fair but easily understood and tax efficient.

The final advantage of making use of expert legal advice is that it allows you to stay firmly apprised of the ever shifting legislative framework. Governments of all kinds and throughout the world seek to encourage investment, prosperity and business growth via a constant tweaking of the law, and members of the legal profession are generally amongst the first to be aware of such changes and to realise the implications they will have, good or bad, for your business. By accessing regular legal advice you’ll be able to stay one step ahead of changes in the business landscape and of your competitors, meaning it becomes a sensible investment, rather than an avoidable expense.


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