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Starting and growing an online business can be exciting. Still, business owners must navigate the legal landscape carefully, especially when securing funding. Whether you are seeking investments from venture capitalists, considering crowdfunding, or exploring traditional loans, understanding the legal aspects is paramount. This article will delve into four essential legal considerations to remember when funding your online business.
1. Business Structure and Registration
Before you begin seeking funding for your online business, it is essential to establish a legal structure and register your company.
The most common business structures are:
- sole proprietorships;
- partnerships;
- limited liability partnerships (LLPs); and
- limited companies.
Each structure has advantages and disadvantages, including:
- liability protection;
- tax implications; and
- reporting requirements.
Once you have selected your business structure, you must register it with the appropriate authorities. For limited companies, this involves registering with Companies House, where you will need to provide information about your business, such as:
- the business name;
- registered address; and
- details of directors and shareholders.
Registering an LLP also requires filing with Companies House, while sole proprietors and partnerships should notify HM Revenue and Customs (HMRC) of their business activities.
Choosing the right structure and ensuring proper registration is the first step in funding your online business. This establishes your legitimacy and provides a clear framework for investors and lenders to evaluate your business.
2. Compliance With Financial Regulations
Complying with financial regulations is another crucial aspect when funding your online business. Failing to adhere to these regulations can result in penalties, legal action, or even business closure.
For example, Anti-Money Laundering (AML) regulations require businesses to implement measures to prevent money laundering and the financing of terrorism. If your online business involves financial transactions, you may need to register with HMRC as a Money Service Business (MSB) and put into effect AML policies and procedures.
Ensuring compliance with these financial regulations is a legal requirement and a way to build trust and credibility with potential investors and lenders. Demonstrating that you take financial regulations seriously makes your business more attractive to those who provide funding.
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3. Intellectual Property Protection
Intellectual property (IP) is valuable for many online businesses, especially small businesses built around unique products, services, or creative content. Protecting your IP is essential to prevent others from using, copying, or profiting from your ideas and innovations.
For example, registering your business name, logo, or product name as trademarks can provide legal protection against others using similar branding. This helps build brand recognition and can be an attractive feature for investors.
Additionally, if you license or collaborate with others, ensure that you have clear agreements in place to outline IP ownership and usage rights. This prevents legal issues down the road and puts you in clear control of your IP.
Properly protecting your IP can enhance the value of your online business and make it more appealing to investors and lenders. It also provides a legal framework for addressing IP-related issues in the future.
4. Investor and Funding Agreements
Once you have identified potential investors or funding sources, it is critical to have legally binding agreements in place to protect the interests of all parties involved. These agreements outline the terms and conditions of the funding arrangement, including each party’s legal requirements and responsibilities.
For example, a shareholders agreement is essential if you are raising capital by issuing shares in your limited company. This document outlines:
- how the business will be run;
- the rights of shareholders;
- dispute resolution procedures; and
- the procedure when a shareholder wants to sell their shares.
Alternatively, if you are using a crowdfunding platform to raise funds from multiple investors, the terms and conditions should be clear and compliant with the platform’s requirements. Ensure you understand the platform’s fees and the obligations that come with accepted investments from numerous individuals. In this scenario, it can be helpful to have a business plan for your new business that sets out expectations regarding cash flow, business concept and use of funding.
This guide sets out how to set up, finance and grow an online business in the UK.
Key Takeaways
Funding your online business involves navigating a complex legal landscape. By carefully considering your business structure, ensuring compliance with financial regulations, protecting your IP, and having legal funding agreements, you can position your business for success while minimising legal risks. Seeking legal advice from expert lawyers can often be a wise investment to ensure your business’s long-term growth and sustainability.
If you need legal assistance funding your online business, our experienced ecommerce lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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