The most common (and some of the strangest) legal problems for small businesses

January is bookended by two unpleasant annual traditions; while the first few days of the month feel sluggish (and indeed ‘sloggish’) as the New Year and Christmas hangover disappears, the end is marked by the ordeal of the Self Assessment tax deadline.

January, however, is a time to start anew, and to reassess how you take care of business.

And in the spirit of improvement, what better place to start than with the legal side of your business? According to the Legal Services Board’s research last year, legal problems cost small businesses an estimated £100bn annually. This is a hefty figure, but what’s more incredible is the direction that some of these problems can take.

Here are some of the strangest legal issues affecting small businesses I have personally encountered in the course of my career:

• a party that hoped to enforce a legal contract summarised on a napkin and signed in a curry house
• negotiating a contract with another lawyer for a small company who insisted that the terms be sung down the phone in an operatic voice
• two parties deciding the advance payable for a contract by reference to the number of grapes which fell off their stalks when dropped onto a plate
• advising a driver from a small firm accused of illegally soliciting for business as an unlicensed taxi driver, whose defence was that when shouting “taxi” at a potential customer through the window of his car, he was, in fact, offering them a bar of chocolate under the brand name Taxi (anyone remember them?!)
• two parties agreeing a price for a window glazing contract which includes a date with the proprietor’s mother in law – try writing that one down in a contract!

Aside from the quite frankly ludicrous and peculiar legal problems that only occur once in a blue moon, there are very common mishaps that can strike at any time – and they do. Here are my top five most common legal pitfalls for the small business:

1. Employment issues

Lots of SMEs take on new staff but without bothering with formal procedures like drafting robust contracts. This can create needless uncertainties around pay, benefits, term and duties. Both foolish and foolhardy, this also makes unclear the responsibilities concerning legal obligations around pensions, data, and grievance procedures, as well as rendering the issue of dismissal rights rather murky. In short, it’s a recipe for disaster.

2. Partnership issues

A number of small businesses are founded by friends and family, or colleagues from another business setting. In scenarios such as these, where people already know each other well, it is tempting to not bother validating the small print of partnership agreements. But regardless of the nature of your business, failure to set these things out clearly at the start can cause lots of heartache down the line. You must make crystal clear who controls what, and everyone’s responsibilities, rewards and exit rights.

3. Intellectual property disputes

SMEs undervalue protecting intellectual property, seeing it as too expensive, a waste of their time, and too difficult to enforce. This is an illusion. Copyright (for example, in software) does not need to be registered at all – merely produced in physical form – written down) and asserted with proper use of a “c” notice. Likewise, a UK or European trademark is not expensive to register. Patents are certainly more complicated and more expensive, but even an application for a patent can give investors reassurance and at least deter potential infringers.

4. Funding problems

Once again, a cavalier attitude to formalities is a no-no, especially if your company’s investors are family or friends, or the investment deal disproportionately favours professionals (angel investors or banks, for example.) Arguments and a loss of control of your business can ensue, the business could be massively diluted, and provisions made could make future investment much harder.

5. Contracts that go wrong

At last you have a client or a customer – a cause for celebration if ever there was one! Think a handshake will do, or an email exchange to form the agreement? Often this is not enough. A simple email will miss out detail on payment calculations, payment dates, allowable deductions, obligations to sort out things that go wrong, as well as termination rights. Legislating for these hazards in advance is far more prudent than when you are in the middle of an argument and not thinking clearly.

As the old adage goes – fail to prepare, and prepare to fail. While it’s easy to get caught up in the heady buzz of starting a new business venture, spotting the flaws in your plan early on is crucial. Particularly if a date with a mother in law is at stake.

Clive Rich, founder and chairman of