Common Oversights and Legal Implications associated with Establishing a Startup

Deciding on the type of legal structure to build your business on may seem like a superfluous task, one that you think should be left to your legal advisors. That, however, is far from the truth. Establishing a startup, with its own company name and brand, suggests that this company is intended to be a permanent and ongoing structure, dedicated to effective and responsible management, possibly opening up new business opportunities which may not have existed beforehand. Equity finance for example, may be more easily accessible through the creation of a viable startup. But what are the legal implications associated with setting up such a structure?

An often overlooked point is that it is imperative that the company be properly and duly formed, and the appropriate licences, if any are required, are obtained. The incorporation of a company endows it with legal personality which is separate and distinct from that of the individuals owning, running or operating the company. Following its successful formation, this separate entity is able to trade and transact on its own steam. Accordingly, the owners’ liability is limited to the amount, if any, unpaid on the shares respectively held by each of them. Moreover, the notion of separate legal personality facilitates a founder’s exit process as and when the founder feels that the time is ripe for such to take place. The agreement that exists between the founder and any other individuals involved in the creation of the startup, in terms of roles and responsibilities for example, should be clearly set-out in order to prevent complicated issues arising at any point of the startup and/or the exit process.

Maltese law is sensitive to the fact that different structures and sizes of companies may have inherently different types of risks and requirements. Some matters that may be easily dealt with by large corporations may not be feasible for newly founded startups. For example, the Companies Act (Chapter 386 of the Laws of Malta) was recently amended to allow more companies to qualify as a ‘small company’. These amendments have permitted certain small, private companies to do away with drawing up particular financial documentation and reports such as profit and loss accounts, directors’ reports and auditor’s reports. These exceptions enable small startups that are usually strapped for cash, especially in their early days, to significantly save on fees which are associated with the standard cost of business operation.

If the purpose of the business startup are intended to be mostly client-facing, the company should have a ‘standard form contract’ drafted that would be used when dealing with customers or clients. This contract should not be a generic template but should be tailored to the specific functions of the startup. Startups should also have prepared standard employment documents to be signed by employees in order to ensure compliance with the relevant tax and employment regulations.

Following the startup’s successful formation, it may be beneficial to protect any intellectual property rights that may belong to the startup or its founder. For example, a software development startup should make sure to be aware of any intellectual property rights that it may have over any source codes created. An essential point about legal protection of intellectual property is that, if sufficiently protected, intellectual property converts intangible assets into exclusive property rights, although for a specified period of time. It enables a startup to claim ownership over its intangible assets and utilise them to their maximum potential. Moreover, these valuable exclusive assets can often be traded in the market place, adding value to the company’s overall worth.

As an entrepreneur, much thought should be given to the type of business structure that you think would be appropriate to the business that you have created. Setting up the appropriate business structure will enable you to clearly envision the direction you anticipate your business to take and direct you as to which laws and regulations the startup must abide by.

For more information contact donald.vella@camilleripreziosi.com or andrei.vella@camilleripreziosi.com.

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