SOME BRIEF NOTES FOR STARTUPS IN THE UK

Introduction

I am a lawyer who among other things, tries to give advice to people setting up their own businesses. I am also a founder director of a group which supports and lobbies for small and bigger companies which have been destroyed by actions of some major UK banks over the years.  I hope these notes are useful.

I am the long-time lawyer for Fashion Capital ( www.fashioncapital.co.uk ). These notes come out of discussions I have from time to time with people involved in start-ups or fairly new companies both in the fashion sector and more generally. They are not in any way intended to be a substitute for legal advice, but merely to provide some initial thoughts for you; you should take your own specific advice if you want further assistance on any of the matters described below.

Before I prepared these notes, I tried to work out what I thought you might like to know, about based on my experience of advising many start-up companies over many years. As I like to think I am a commercially minded lawyer I knew I needed to strike a balance between legal niceties and business practicalities. Please do ask questions as we go along. These notes don’t look at tax or accounting issues. As noted below there is a huge amount of information available when you look for it. I am sure that someone, somewhere will be able to help you with your questions.

Remarkably, at least to me, it is still a very popular time for people to form a new business. I do a lot of writing and lecturing on all sorts of things relating to business law in its widest sense and have a big hang up with over-regulation and red tape. I am convinced that companies could operate much more effectively if layers of rules and regulations were removed, but despite all the best intentions by some, it looks as if we are stuck with what we have, so we better get on with it.
Despite a lot of debate about it we can I think say that setting up a new business in England (and the rest of the UK) is as simple (if not simpler) as anywhere else.

• There are more than 4 million small businesses in the UK (so those up to 50 employees);
• SMEs (so those up to 249 employees) account for 99 percent of all enterprise in the UK, 60 percent plus of private sector employment and 48 percent plus of private sector turnover.
• SMEs employ more than 12 million people.
• Generate £1.8 trillion in turnover.

I thought I would go through some of the key issues which you should think about when you are setting up a new business venture.

But maybe first we need to identify what we mean by setting up a business. Why? Because getting it wrong could have effects not only on the business itself but on you as owners/managers/directors. There are really five main choices, but I want to concentrate on just two;

• Sole trader;
• Private limited company.

The easiest way to start to trade is in your own name and on your own behalf. So, there is nothing to stop me starting to trade later on today under the name Nick Gould. This route does not separate me as an individual from my business. So, customers and suppliers and anyone else I decide to contract with during my business life will be contracting with me, personally and as an individual. All the income/profits are mine, but so are all the risks and liabilities. I will be personally liable for all debts of my business. But because the tax, accounting, and National Insurance issues are straight-forward this is the preferred route for many businesses. To start as a sole trader, register with HMRC as being self- employed. You will need to keep accounting records of your business and income and expenses and to file self-assessment tax forms. Management decisions are easy - no arguments or partnership or shareholder disputes (a point not to be under-estimated as we will see) as all the decisions will be yours. You will be self-employed—we will talk about employment later on. But the big downside as I have mentioned is on the risk and liability side. If it all goes wrong these will all land on your own personal doorstep.... which takes us on to the benefits of the limited liability company.

The great advantage of this route is that however big or small the company, it is separate and distinct from its shareholders (owners) and directors (managers). So, if I form a company and I am the sole director and own all the shares if it goes bust the liability stops and stays with the company in most circumstances. If things go wrong and there is a breach of contract, again it is the company which gets sued, not me. So, it looks to be a much better option than the sole trader, not only for the reasons just mentioned but also the fact that as it is separate it can be more tax efficient and owners can find it easier to raise finance; but the key point is the separation I have just mentioned. Downsides are mainly the regulatory burdens.

That was the first legal bit.  I suspect most of you will either start off as sole traders and move on to take limited liability or start at once down the limited liability route. Assuming you are in this to grow your businesses, I am not sure (even if it seems a good idea to start with) there is any real benefit in not incorporating at the outset. Despite what I said about red tape, Companies House are helpful both on the phone and through their website (see link at end of this note). They seem to have guidance on almost every area of company formation and afterward. It is easy to form a company. Sometimes the forms you need to complete, are a bit unclear but, again, Companies House will help you if you get stuck and there are lots of guides available on the web, and of course if anything more complicated comes up you can always get advice. The simplest company is one which has you as a sole shareholder and sole director holding just one share. Private companies don't need to have a company secretary. What else do they need, well they normally need a VAT registration and to complete some tax forms, but again that is fairly easy.

But here is my first red warning sign, and it comes from practical experience. You form your company and your best mate wants to join you and does, all is fine, you have a share they have a share, you are a director, they are a director and you do pretty well for a couple of years - cash in the bank, brand developing nicely, lots of new biz, hire staff, take on a new lease - and then you find out they have been running a similar business behind your back, ok you say “go”, but how? You are essentially (in non-legal terms) partners. What's yours is theirs and vice versa and then somewhere at the back of your mind you remember that bloke (some lawyer - really boring and who cared what he said) suggesting that maybe some sort of agreement would be a good idea, just in case something goes wrong, you would have a way of sorting it out. But hey, you said, it won't go wrong. We are often asked why it is so important to document the relationship between the shareholders of a private limited company. In particular, we are often asked: “why should we waste time and spend money when nothing will go wrong?”
Although it may seem a bit weird for a couple to 'contemplate a prenup before they wed' (no-one wants to think of the negatives when all are so positive about the future), thinking about potential problems and dealing with them in a shareholders' agreement can more often than not prevent such problems arising, either because they are dealt with in the shareholders' agreement or because the parties are wise to potential dangers, having thought about them in advance, and act accordingly.

Here is a real-life example of why a little money spent at the outset can be for the best. There are so many others. I spend a lot of my time sorting these things out.

Mr. Smith's company is doing well but he is not getting any younger and wants to slow down. He brings into his company, where he is currently sole shareholder and sole director, Mr. Jones, to whom he sells 25% of his shareholding for £25,000. It is agreed that if Mr. Jones leave he will resell those shares to Mr. Smith. Five years later the company has expanded dramatically and is making lots of money. It has trebled its workforce and can barely keep up with its orders. However, Mr. Smith and Mr. Jones are unable to carry on working together and Mr. Jones wants out. Mr. Smith says that's fine and he will buy his shares back for the same price at which Mr. Jones acquired them, i.e. £25,000. Mr. Jones is not a happy man! He suggests that the price for the shares should reflect the massive rise in the company's profitability and requests a figure some thirty times that amount.  There is no documentation to assist.  A simple agreement (even if covering little else) might have suggested words to the effect that “if Mr. Jones leaves, his shares will be valued by an independent third party (which may include the company's auditors), and such valuation will be the price at which Mr. Smith will purchase those shares”.  Of course, the clause could have been slightly (or much) longer but even some basic wording ought to have done the trick. In the end, the parties agreed what was a very expensive deal for Mr. Smith on the steps of the court. His total cost, including the cost to buy the shares and legal fees for both parties, pushed £750,000.

The fact there was no shareholders' agreement or indeed any other form of agreement added significantly to the drama. A good lawyer advising clients setting up any form of shareholder relationship arrangement would always suggest some sort of written document between them. It could be as long or as short as they wish. None of this is particularly difficult or particularly expensive. The cost of litigation is significantly greater in time, cost and management terms than the cost of having a short, clear shareholders' agreement drawn up at the outset. Oh, yes and the emotional cost is no fun either.

Other points we might want to think about will I am sure include employment and intellectual property.

Some types of IP rights-briefly...

Patents

Patents protect against unauthorised use and exploitation of an invention. To qualify, the invention must be new (never having been disclosed or publicly used before), must not be an obvious development of existing or known technology, and must be capable of industrial application. Discoveries, software and business methods as such, are not patentable {although the law is developing flexibly in the case of the last two). As with most IP rights, they are territorial in nature. Applications are made to either the UK or the European Patent Office and undergo an examination and possible opposition process before grant or rejection. UK and other European patents last 20 years from the filing date, provided that renewal fees are paid and the patents are not invalidated.  A patent provides, a monopoly defined by the “claims”

Independent creation is no defense: the monopoly is total. All patents effective in the UK are publicly available documents, published by the Patent Office.

Copyright

Copyright protects against unauthorized copying of the whole or a substantial part of artistic, dramatic, literary and musical works or sound recordings, films, and broadcasts. No registration is required as the right arises automatically. It lasts, in many cases, for the life of the author plus 70 years. Copyright does not provide a monopoly right: if a similar or identical work to the copyright is produced independently and without copying, it will not infringe the copyright work.

Database Right

Database right exists independently of the copyright (if any) in a database and protects the compilation of information comprising the database. The right arises automatically, provided that at least one of the makers of the database is from the EEA and there has been “...a substantial investment in obtaining, verifying or presenting the contents of the database.

UK Product Design

This is a national monopoly right over designs of the whole or part of a product (including its packaging) relating to its shape color or texture, amongst other features. To be registrable the design must be new and have “individual character” (leaving a different overall impression on an informed users). It can last for up to 25 years from application. Independent creation is not a defense to copying.

UK Design Right

This is a right to prevent reproduction of designs. It covers the design of any aspect of the shape or configuration of the whole or part of an article. It does not cover surface decoration. No registration is necessary. It lasts for up to 15 years from creation. There are strict qualification criteria for foreign nationals who wish to claim ownership of UK design rights.

Community Designs

The RCD came into force in March 2003. Under the RCD a design may gain Community-wide protection to the extent that it is considered new and has “individual character” (see UK registered designs above). An unregistered Community design lasts for three years from the date on which the design was made public within the Community. On registration of the design by the Office for Harmonisation in the Internal Market, the design will be protected by a registered Community design for up to 25 years.  A registered Community design is a monopoly right to prevent others from making, offering, putting on the market, importing, exporting and using a product in which the design is incorporated or to which it is applied or stored for such purposes. An unregistered Community Design only protects against copying the design.

Know-How

This is not an intellectual property right as such. Know-how can be protected on the basis that it is confidential information. Protection is usually established by contractually imposed obligations to prevent unauthorised misuse or disclosure by others.

Trade Mark

A trademark is a sign used by a business or trader to differentiate their goods from those of other traders.

Many trademarks are symbols but they may also be names, labels, slogans or a jingle/sound.

Why register a trademark?

It is important to protect your “brand” and one way to do this is by registering a trademark. Registration allows you to use your mark exclusively in the UK. Brand loyalty is highly sought after but it needs a trademark to which loyalty can attach. Achieving extensive brand recognition and loyalty is a key ingredient to commercial success.

When you register a trademark, it becomes your property and as such you can sell it, licence it to others or franchise it. It also makes it easier for you to take steps against anyone who uses your trademark without your permission.

If someone else uses the “brand” or trademark that you have not registered, you will still be able to take legal action against them using the common-law action of “passing off'. However, to be successful in such an action you must be able to establish that the mark is yours, that you have built up a reputation in the mark and that you have suffered a loss because someone else has used your mark. Success can be very difficult and will be very expensive.

What remedies does registration provide me with?

There are four main remedies available to you should you be successful in showing that the use of your registered trademark has been infringed, these are set out below in more detail:

1. An injunction

The Court may grant an injunction to prevent the infringing party from continuing to use your trademark. But very expensive to bring to Court.

2. Damages or an account of profits

Damages will be granted as compensation to you for any loss caused by the infringement. The intention is to put you in the position in which you would have been in but for the infringement. Accounts of profits mean that you can claim any profits the infringer has made from the infringement. However, you must elect which of these options you would prefer, damages or account of profits.

3. Order for removal of offending signs from infringing goods or materials

The court can order the infringer to remove the infringing mark from goods, materials or articles produced by the infringer. The court also has the power to require that any offending articles are destroyed.

4. Delivery up of goods

If the court does not believe that the infringer will comply with an order to remove or destroy offending material, it can order that the goods are delivered to a third party who will carry out the process instead.

How do I register my trademark?

Before you make an application to register your trademark you should visit the Intellectual Property Office's (IPO) website http://www.ipo.gov.uk/ and carry out a search to ensure that an identical or similar mark is not already registered.

The required application form can also be found on the IPO's website and it should be accompanied by the appropriate fee. The application form should contain a representation of the mark and the specification of goods and/or services it relates to.

The application form will be examined to ensure it meets the formal and legal requirements for registration. Applicants should note that an application will fail if the proposed mark lacks distinctiveness or if there are conflicting rights.

Once accepted, all applications are published in the Trade Marks Journal.  Registration will take place if no objections are received within three months of publication in the Trade Marks Journal. The entire process can take between 6 - 18 months from initial application. Initial registration lasts for 10 years from the date of application; it can be renewed for further 10 year periods on payment of a fee.

Employment Status

I just want to mention briefly issues about the employment status of an individual.  It’s a big topic and you may need to get further advice, but as with so many of these things, keep notes of key meetings and discussions and communicate clearly with your employee or freelancer.  The status of the individual is important for a number of reasons - for example, certain key legal rights only apply if an individual is an employee although increasingly statutory rights are also being granted to workers.   As you would probably expect me to say, the question of whether an individual is an employee or not is difficult to answer It still remains impossible to set down a clear set of defining guidelines against which an individual's status can be definitively determined although as I mention below a recent Supreme Court case has made some steps in doing so.

Just to give you an idea, under the Employment Rights Act 1996 an employee is defined as “an individual who has entered into or works under a contract of employment”.  A contract of employment means “a contract of service or apprenticeship whether express or implied and whether oral or in writing”.  We have to distinguish between a contract under which a person gives services as an independent contractor under a contract for services – I guess we could call that a freelancer.   The terms “contract of service” and “contract for services” don’t have a statutory definition. In simple terms, under a contract of service, a person agrees to serve another, while under a contract for services they agree to provide certain services to the other. But that's only the start rather than the end of the legal analysis.

As noted, it's important because employees have more employment rights than workers and the self-­ employed.  Again, in very simple terms, if the individual is under the control of the employer then the individual is likely to be an employee.   Control includes setting an individual's hours and place of work; telling the individual what tasks to complete and how to complete them and providing the individual with facilities and equipment to undertake those tasks.  We also have to consider whether there is what is called a mutuality of obligation between the individual and the employer, i.e. is the employer obliged to provide work and is the individual obliged to accept work? How the parties treat the working relationship is another relevant factor. If the individual is paid through PAYE, is paid for holiday and sickness absence and/ or has expenses reimbursed then these would all point to an employment relationship.  If the individual only meets some of the requirements then they are likely to be something else. However, what you need to remember in the end is that doesn’t matter what “label” is applied to the relationship, the issue will be one of fact.

I want also to mention the contractual relationship in all this.  Employees are entitled by law to be given a note of their terms of employment.  However, there is nothing to stop any of you when you take on people as freelancers or consultants or whatever else you want to call them to get them to enter into a contractual arrangement as well. This goes back to what I was talking about earlier, which is one of the key themes of this talk so far as I am concerned.  You need to protect yourselves. You are not protecting yourselves about what is going to happen at this particular moment - it’s what might happen when you and your workers, consultants, employees or whoever fall out.  Without some form of contractual framework, you are going to have costs and expenses much greater, as I have already mentioned, than if you have some sort of formal agreement written down.

So, for an employee, we can easily discuss the sort of terms of a standard employment contract which are going to be relatively straightforward I suspect at the level we are talking about. For a self-employed freelancer or consultant, or whatever else we want to call them, you should certain have arrangements written down which define what they are going to do, how they are going to do it and so on. You have already heard from me the distinction between an employee and someone else so clearly in the latter circumstances you want to ensure you are not entering into an employment contract if that, indeed is the case.

However, if we take the case for a moment of someone who is freelancing for you and you are concerned about the protection of intellectual property rights. there is nothing to stop you in your arrangements, or agreements with them using a similar sort of clause as in a standard employment contract to the effect that anything they might do in the course of working with you will, if it is a creation, invention, design or whatever be an asset of the company rather than of the consultants. What you would need to watch here is the terms used, i.e. we don't want to go into “employee/employer relationships”.

I want to mention a very recent case involving Pimlico Plumbers decided in June 2018.

The Supreme Court ruled that a plumber classed as self-employed was, in fact, a worker, in a landmark case for the gig economy, despite an appeal from Pimlico Plumbers which claimed that the plumber, who worked at the company for six years, was self-employed. Despite paying self-employed tax and being VAT registered, he was a worker, the Supreme Court said. Worker status means entitlement to a national minimum wage, holiday pay and protection from discrimination.

The decision has the potential to impact the rights of many people classified as independent contractors across the UK, including those at gig economy firms such as Uber and Deliveroo.

The company argued that he had freedoms, such as the option to substitute someone else to carry out his work, if he wished. But the Supreme Court said: “The dominant feature of Mr. Smith’s contract was that he must do the work himself.” The company exercised “tight administrative control” over Mr. Smith and he “undertook to do the work personally”, the Supreme Court said.

Pimlico Plumbers required him to wear a company branded uniform and to lease one of its vans, which displayed the company's logo and was equipped with a GPS tracker. He also had to work a minimum number of hours per week. This, like so many employment case decisions, is “fact-specific”, so we will have to see how the law develops.

Website Terms and Conditions-very briefly

Website terms of use enable the website owner to prevent unauthorized access to the website, unauthorized reproduction of material on the website and control other behavior related to the use of the website.

They also allow the owner to limit any potential liability to users of the website. The owner must ensure that they are compliant with Data Protection Law, the Cookies Regulations and if they are selling products through the site, Consumer Protection Regulations.

The terms should be a contract between the website owner and user and ideally a user should be required to review the terms and conditions and “accept'' them, although this is not always practical or user-friendly.

A link to the terms and conditions should ideally be visible on every page, such as along the bottom of the page.

The owner should make it as clear as possible that the user or visitor to the site accepts the terms of use and agrees to be bound by them.

Terms and conditions will depend on the nature and content of the website.

There are a number of clauses that are usually included:

1.  Information about the website and its owners
2. Accessing the site
3. Intellectual Property
4. Reliance on information posted on the site
5. Changes to content on the site;
6. The owner's liability;
7. Information about the visitor and their visit to the site;
8. Transactions concluded through the site;
9. Viruses/hacking;
10. Linking to or from this site;
11. Jurisdiction and applicable law; and
12. Trademarks.

General Data Protection Regulations

These are new rules which came into force in May. They affect every organisation which holds personal data. Europe is now covered by the world's strongest data protection rules. The mutually agreed General Data Protection Regulation (GDPR) came into force on May 25, 2018, and was designed to modernise laws that protect the personal information of individuals. GDPR alters how businesses and public sector organisations can handle the information of their customers. It also boosts the rights of individuals and gives them more control over their information.

What is GDPR exactly?

The GDPR is Europe's new framework for data protection laws. It started on 25th May 2018 and replaced the UK’s Data Protection Act 1998 by a new Act. It is enforceable and administered by the Information Commissioner’s Office. There are new rights for people to access the information companies hold about them, obligations for better data management for businesses, and a new regime of fines. Just so you know, Brexit isn’t relevant to the GDPR.

Is my company/ start-up/ going to be impacted?

Yes. Individuals, organisations, and companies that are either controllers or processors of personal data will be covered by the GDPR.  A data controller is someone who decides the purposes for which and the manner in which personal data will be processed—so they exercise overall control. The data processor processes the data on behalf of the data controller.
Both personal data and sensitive personal data are covered by GDPR. Personal data, a complex category of information, broadly a piece of information that can be used to identify a person. This can be a name, address, IP address. Sensitive personal data encompasses genetic data, information about religious and political views, sexual orientation, and more.

There are eight rights for individuals. These include allowing people to have easier access to the data companies hold about them, a new fines regime and a clear responsibility for organisations to obtain the consent of people they collect information about.

"One of the issues with start-ups is that when they're going through all the formalities new businesses go through, there's no data protection hook at that stage," 

Access to your data

As well putting new obligations on the companies and organisations collecting personal data, the GDPR also gives individuals a lot more power to access the information that's held about them.

A Subject Access Request (SAR) allows an individual the ability to ask a company or organisation to provide data about them. Previously, these requests cost £10 but GDPR scraps the cost and makes it free for you to ask for your information. When someone makes a SAR, businesses must provide the information within one month. Everyone will have the right to get confirmation that an organisation has information about them, access to this information and any other supplementary information. 

As well as this the GDPR bolsters a person's rights around automated processing of data. The ICO says individuals "have the right not to be subject to a decision" if it is automatic and it produces a significant effect on a person. 

The Regulations also give individuals the power to get their personal data erased in some circumstances. This includes where it is no longer necessary for the purpose it was collected, if consent is withdrawn, there's no legitimate interest, and if it was unlawfully processed.

GDPR and other data protection laws rely on the term 'personal data' to discuss information about individuals. There are two key types of personal data in the UK and they cover different categories of information.

Personal data can be anything that allows a living person to be directly or indirectly identified. This may be a name, an address, or even an IP address. It includes automated personal data and can also encompass pseudonymised data if a person can be identified from it.

GDPR calls sensitive personal data as being in 'special categories' of information. These include trade union membership, religious beliefs, political opinions, racial information, and sexual orientation.

What should we do to comply?

The enforcement date for GDPR has passed but data protection is evolving. It will never be completely possible for businesses to be fully "GDPR compliant".

Keeping on top of data can be a tricky thing – especially when businesses are evolving the services that are offered to customers. The ICO's guide to GDPR sets out all of the different rights and principles of GDPR.

It also has a starter guide, that includes advice on steps such as making senior business leaders aware of the regulation, determining which info is held, updating procedures around subject access requests, and what should happen in the event of a data breach. 

And don’t worry. Provide you are taking steps to comply with the new rules you should be fine. The ICO has made it clear they will work with and help people /companies that are trying to comply. It is those who just bury their heads in the sand who could be in trouble.

Useful websites

Information Commissioner	ico.org.uk
Intellectual Property Office	ipo.gov.uk
Her Majesty's Revenue &Customs	hmrc.gov.uk
Business Link	businesslink.gov.uk
Companies House	companieshouse.gov.uk
Government Website	direct.gov.uk

I hope this has all been helpful...you can contact me at  nick.gould@gunnercooke.com