When starting a new business, the decisions that need to be made can seem complex and daunting.
From a legal perspective alone, decisions have to be made on the business structure and contractual arrangements between shareholders and with third parties.
Start-ups normally operate with finite financial resources which, understandably, are focussed on the primary needs of the business. Therefore, spending on non-core requirements must be limited to the essentials. Below we have compiled a list of four key areas on the legal/compliance side that are worthy of specialist input and support at an early stage. The list below aims to strike a balance between limiting legal spend and recognising the value of putting in place effective structures from the outset to facilitate growth and protect the business.
The most common type of company in Ireland is the private company limited by shares. Such companies limit the liability of shareholders to the amount they invest in the company for shares (often as little as €1.00 at the outset). The limited liability nature of such a company makes it much more attractive to potential investors. The costs are low for incorporating this type of company, particularly when weighed against the potential benefits.
If possible, the share capital structure should be simple and straightforward, with just a single class of shares being preferable. It may be suggested to you that where there are to be multiple shareholders in a company, you should have different classes of shares providing distinct rights to the various shareholders. However, incorporating different classes of shares with separate rights will make the drafting of the company's constitution more complicated and more expensive. A complex structure might also act as a deterrent to prospective investors. We would recommend that, where possible, any such complications are best avoided at the start-up stage. There will be plenty of time to create more complicated share capital structures if and when investors come on board.
Where a company has multiple shareholders, we would strongly advise putting in place a shareholders' agreement. A shareholders' agreement is a contract between the shareholders of a company, and the company itself, aimed at regulating the relations between shareholders and the future management of the company.
The basic purpose of a shareholders’ agreement is to specify how the company is to be managed and, as far as possible, to address in advance any issues that might become divisive in the future if not agreed beforehand. This agreement can be crucial in limiting the damaging effects of future conflicts, which can prove catastrophic for any company, by prescribing the means by which they should be resolved as well as setting out the basis on which relations between shareholders should be conducted.
It is really worthwhile establishing an effective system for record maintenance and filing of key documents (with the Companies Registration Office, the Revenue Commissioners, etc.) at the very beginning. Good practices in relation to maintaining records will pay dividends in the event of a potential investment by a third party investor. An investor will want to carry out due diligence on the business and a key area of their focus will be investigating existing shareholdings, ownership of assets and key contracts to which the company is party. Having this information easily to hand and in good order will present a positive impression of the business and how it is run.
Where a start-up business has a small or non-existent administrative team, it can be more time and cost efficient to outsource some record keeping functions, freeing up management to focus on the business not to mention the peace of mind that comes with knowing that this is taken care of. Maintenance of the company’s statutory registers could, for example, be outsourced to a professional company secretarial provider. Our company secretarial team can assist with the incorporation of a company, ongoing maintenance of company records and making necessary Companies Registration Office filings.
Where the value of a company lies in its intellectual property (IP), it will be particularly important to ensure that the company has clear evidence of its ownership or entitlement to use such IP. Any assignment of IP to the company should be properly documented. It is worth noting that such assignments must be in writing and cannot be made orally. Steps should be taken to ensure that any IP created by third party contractors on behalf of the company, or that may have been created by the promoters prior to the incorporation of the company, becomes the property of the company.
Where you are developing a brand, consideration should be given to protecting that brand through the registration of trade marks and the protection of other intellectual property rights.
We have a wealth of experience in advising start-ups and providing guidance on key legal considerations to those setting up a business. Our team has expertise in corporate and commercial law, intellectual property, employment, and company secretarial and compliance services, enabling us to provide effective guidance to those starting a new business venture.
This article appeared in Business Plus, February 2017.