Top 3 biggest legal mistakes startups and SMEs are making in 2023

Since we started Sprintlaw in 2017, we’ve helped thousands of startups and small business clients with their legal needs. As one of the first firms in Australia to provide SME legal services at scale, we’re starting to see trends and patterns in the legal needs of Australian small businesses, and identify the most common legal mistakes that smaller companies typically make.

In this article, I’ll be discussing what the top 3 most common legal mistakes that startups and small businesses make are, based on what we’ve seen, and what you can do to prevent them.

1. Forgetting to register a trade mark

The most common mistake we see early stage businesses make is failing to register a trade mark for their business name or their product names. 

A trade mark is a form of intellectual property which gives the owner certain exclusive rights to registered words, phrases and logos. If you successfully register a trade mark for a name, phrase or logo, it means you can stop others from using that name, phrase or logo without your permission.

Trade mark registrations are not all encompassing – they are limited by country, by ‘class’ (similar to industry), and can only be registered for a certain time period (usually 10 years). 

For example, Sprintlaw currently owns the trade mark for the word ‘Sprintlaw’, in class 45 which is the ‘legal’ class, in Australia and several other countries. This means that nobody else can use the word Sprintlaw (or anything similar, e.g. like ‘Sprintlegal’) to represent their goods or services in the legal industry in Australia or other countries, for the duration of our registration.

Trade marks are really important. If you’re going to be investing time, money and effort in building your business and building your brand, you want to make sure you check your brand name is available and, if possible, own it.  

If you don’t, it might be that somebody else has already registered a trade mark and, without realising it, you may be committing trade mark infringement. Or somebody else may come along with the same or similar name after you and secure the trade mark, and then attempt to shut you down.

We have had many clients face liability and be forced to rebrand because of these issues, usually which could have been avoided if they’d simply thought about their trade marks from the beginning.

A very common misconception is that if you make a business name registration or 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 trade marks.

These registrations are more like an administrative/legal requirement and 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. But it doesn’t stop somebody using (or owning) your name as, for example, a product name. 

Trade mark registrations take time. It can take 8+ months to secure one in Australia, and even longer in some other countries. 

2. Choosing The Wrong Business Structure

When you’re setting up a business, you need to select a business structure. The main options to choose from are: sole trader, partnership, company or a trust-based structure. Depending on the nature of your business, there are other structures you can consider too such as not-for-profits or charities.

We see lots of mistakes made around business structures. The most common is individuals opting to operate as sole traders or partnerships rather than companies, to save a bit of 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 (do it yourself). Partnership structures are similar, whereby several partners can jointly register as a partnership online for free. 

But 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 such as your personal savings, your house, or your car.

The company structure is a much safer way to operate a business, and is the structure Sprintlaw recommends to basically any serious commercial operation. Specifically, we recommend the PTY LTD company structure which is usually the correct type of company for startups 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 (who are like the 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 businesses (i.e. the founders will be the shareholders and directors), but 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 will not be able to come after the personal assets of the company’s directors or shareholders, except in a few limited circumstances.

In addition, Sprintlaw often recommends that startup clients opt for more complex ‘multi-company’ structures, which sometimes involve utilising two or more companies and/or holding shares in their company via a trust which is another more complex type of structure. 

These structures usually require 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 also to further reduce the personal liability of business owners.

Company structuring is a step that we see many businesses DIY as they are just keen to get started, and then leave until too late to clean up. Doing it right from the start or as early as possible in your business journey is always better, particularly 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 – and we have seen many business owners and businesses lose out simply because they failed to get proper structuring advice early on.

3. Trying to 'DIY' critical legal documents

The third mistake we’re seeing businesses make is trying to ‘DIY’ their most important legal documents, using templates or online DIY legal software.  

We get it – lawyers are expensive, and legal risk management is not always at the top of founders’ minds. And as a tech-powered legal firm, Sprintlaw does offer some DIY legal documents as part of our subscription because we do believe DIY’ing basic legal documents is OK to do in certain limited circumstances, and we understand the need to make legal services more affordable for smaller companies.

But we believe you shouldn’t attempt to self-service any of your critical or important legal documents. Doing so is very risky, and can actually cause more harm than help.

To explain, there are a multitude of things that can go wrong when you try to DIY legal documents.

• Using the wrong kind of legal document: We very commonly see businesses select the wrong kind of document for their circumstances. For example, T&Cs (terms and conditions) for online businesses vary greatly depending on whether the business is an e-commerce shop, a marketplace, a software as a service (SaaS) model or a mobile application. Frequently, we see businesses download generic T&Cs which just don’t apply to their business model and provide no real risk protection. In essence, there is no point to having them.
• Using a document which hurts rather than helps: Legal documents are usually ‘balanced’ 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 which limits your liability, reduces your risk and secures your payment. If you’re a customer, you want a customer-balanced document which makes sure you can hold the service provider responsible for poor work, obtain refunds where necessary and potentially secure IP ownership in the work you’ve paid for. We frequently see DIY’d businesses use the wrong kind of document – e.g. service providers using T&Cs which actually increase their level of liability to customers instead of reducing it. These can be highly detrimental, and we’ve seen multiple clients face enormous legal liability as a result of this.
• Breaching regulatory requirements: In your industry, there may be regulations which require your legal documents to contain certain clauses or notices. In Australia, there are also the Australian Consumer Laws which 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. But 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 which 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.
• Looking unprofessional: 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 you seriously and it may hurt your ability to sell or grow your organisation. A proper, well drafted set of legal agreements can actually help to grow your business and add to the overall positive impression you’d like to leave on clients or business associates.

So when can you DIY legal documents?

Depending on the context and risk level, there may be some limited circumstances where DIY’ing is OK. Ultimately, it is a risk management decision for you. It’s probably always going to be better to have a (good) lawyer draft your documents instead of DIY’ing, but if the risk the document is intending to protect against is not a major risk, and the cost is high, then DIY’ing may be OK.

For example, if you’re a cafe that has a basic website and enquiry form, then using a template Privacy Policy might be OK. But if you’re a SaaS business that collects, stores and analyses personal information, data privacy is much more important and using a template is risky.

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.

This article was originally published by Sprintlaw, and was republished with permission.