• Avinder Laroya

7 legal mistakes SMEs make when launching and scaling up digitally.

This article covers 7 legal mistakes you should avoid as an SME launching and scaling up digitally.

Online businesses are on the rise especially in the wake of Covid-19. Entrepreneurs are taking their business ideas and starting or pivoting their business to deliver digitally.

  • According to Oberlo, one out of every four people you see is an online shopper.

  • Statista reports that retail ecommerce sales is going to grow from $3.53 trillion USD to $6.54 trillion USD in 2022.

Creating an online business has its advantages as the start-up costs are minimal compared to a traditional business where you would need to obtain business premises to trade.

As an online business the legal obligations compared to a traditional business differ and this article will cover seven legal mistakes to avoid.

In this article we will discuss the following;

  1. What is your business process?

  2. Which Business Structure?

  3. Rules and Regulations

  4. Which jurisdiction are you operating in and selling to?

  5. Ensure your business plan includes legal and business operation risks

  6. Tax and Compliance considerations

  7. Limiting your operational liabilities

  1. What is your business process?

Before you start a business, it is important to establish a business process. Carrying out market research into the business you are launching will enable you to make an informed decision on how to proceed and build your business.

Consider the services and/or goods you will offer to your target market and how you will best reach them. For example, if you intend to sell candles, consider what online avenues already exist like Etsy, Numonday, and Amazon. Look at the relevant costs for you to list and sell your candles on those websites and assess whether that will be cost effective for your business. You may also want to look at other websites such as Shopify which although may not have a large established market, such as Etsy and Amazon, will enable you to set up your own website.

There are many advantages of selling on the above platforms as a small business, however, be aware that any goods and products sold on these platforms are in accordance with the terms of business and payment processing of the platforms and any data is also held with the platform. If you are looking to create your own platform or process your own data and payment processing, then you should obtain legal advice to ensure you are compliant with relevant rules and regulations, contact a member of our team by clicking here.

  1. Which Business Structure?

You should carefully consider which business structure is best for the type of business you are setting up, taking into consideration as an online business where your customer base is located. You should also consider business liabilities and tax responsibilities.

Contact us by clicking here for clear advice on which business structure is best for you. There are several business structures to consider namely;

  1. Sole proprietorship

Some business owners start their business journey as sole proprietors. You do not have to register or declare your sole proprietorship in any register in the UK and business liabilities and administration costs are in your personal capacity. Under this business structure, the business owner and the business are seen as one entity. As such, a sole trader enjoys all profits made by the business. However, you are also personally liable for the business’ debts and losses and any legal claims by your customers or supply chain. In the event of a dispute, you have full personal liability and potentially your personal assets could be seized.

  1. Limited Company

Unlike a sole proprietorship, a limited company is characterised as a separate legal entity to its shareholders and directors. Its directors, therefore, have limited liability hence their personal assets cannot be pursued to recover the company’s debts. There are two types of limited companies i.e. Private Limited companies and Limited Liability Partnerships (LLP’s), further details on LLP’s are below.

  1. Partnerships

A partnership is where two or more individuals bring resources together to create a business. Just like under the sole proprietorship, every partner will reap all the profits of the business but also suffer all the liabilities and losses, unless they are a limited partner. Partnerships take 3 forms i.e. General partnerships, Limited Partnerships, and Limited Liability Partnerships (LLPs).

Ensure that you choose the right partner for your online business. Choosing a partner with whom you share business aspirations and goals will ensure that your online partnership lasts for the long haul. Assess your different strengths and weaknesses and allocate different responsibilities to the best suited partner. Running an online business comes with different tasks such as social media marketing, building social media engagement with your customers, customer service, and responding to orders made through the different platforms on which you are selling your products. Clearly establishing each partner’s roles and expectations from the start will enhance the partnership’s synergies.

Looking to incorporate your business for your new business venture? Check out our business start-up packages developed with the modern entrepreneur in mind.

  1. Rules and Regulations

There are UK rules and regulations that govern the selling of goods and services online. These rules are applicable before and after an order is placed. Before an order is placed, you must provide certain information to the customer such as a description of the goods, your business’ name and contact details, and whether they have a right to cancel their order. After an order has been placed, you must provide the customer with a copy of the contract and ensure that goods are delivered within 30 days from when the order has been placed unless a different delivery date has been agreed. There are exceptions where these rules may not apply, for example, if the goods cost less than £42. Please access the governments guidance here for further rules regarding online businesses.

Failure to have privacy and cookie policies on your website may result in a GDPR breach. A privacy policy explains what customer information you hold and how you intend to use it. It should be clear and easy to understand and cover at least the following sections: i) Introduction which tells the website visitor some information about your company and any special functions on your website, ii) information collected, iii) how it is collected, iv) how it is stored, and v) the business’ contact details.

A cookie policy should inform website users that your website has active cookies, what user data they track and for what purpose. Check out our article here to understand what GDPR is and the steps your business can undertake to ensure its compliance. You can also receive further information on setting up an online business in our article here.

  1. Which jurisdiction are you operating and selling to?

The jurisdiction in which you operate may differ from where your goods and services are delivered. Each jurisdiction has its own laws and regulations governing online trading of various products and/or services, and tax regulations. In the online business sector, it is arguable that the online market boundaries are limitless.

The chancellor recently announced that an agreement has been signed during the G7 talks requiring corporations with a strong online presence to pay corporation tax of at least 15%. Taxes will be paid not only in countries where these online companies have operational base but also in countries where sales are made. Although this reform is yet to be enforced, it has been agreed to match the global digital age.

It is important that you clearly define on your legal documents which jurisdiction you sell to and where you deliver your products. Failure to do so may incur additional costs, tax liabilities and difficulty in delivering the product or service.

  • Statista shows the average order value of an international sale at $147 USD. That’s 17% higher compared to an average domestic sale.

  • Retailers who offer premium international shipping <