So you have a unique and innovative business idea that you’d like to fully invest your time and energy in. But before realizing your entrepreneurship dreams, there’s still the legal aspects to take care of such as incorporating and preparing the legal documentation for your business.
To help aspiring entrepreneurs, Samuel Ng (Director, BlackOak LLC) and Wang Yingyu (Director, Taylor Vinters Via LLC) answered questions and shared tips on starting a business during ‘Legal for Non-Legal Professionals,’ an event co-organized by AsiaLawNetwork, Singapore Corporate Counsel Association, NTUC and the Singapore Human Resources Institute.
Questions Asked (read on to see answers)
- Planning to start a business
- What should I consider if I’m planning to leave my current employer to start a similar business?
- When and how should I leave the job, if I’m looking to start something similar in the industry?
- What do I have to consider if I want to start my own consulting company?
- If I want to start a business with 5-10 employees, how should I structure my business?
- Will starting a tech-related startup be much different from starting a more traditional business?
- Before I start my business, should I patent or copyright my business idea and procedure? If I have to apply for intellectual property protection, how much will it cost and how long will it take?
- Working with lawyers
- Should we send our lawyers to negotiate with our co-founder?
- Is it acceptable for lawyers to give business advice?
- Preparing legal documents
- How should I split the shareholding of my company if my investment comes from family members, and how should I do so if my investors are VCs?
- What is the best way to formalize a partnership with potential partners and co-founders?
- Is it necessary for SMEs already in operation for 1-2 years to review their legal documents?
- Running a business
- If I am already running a company and would like to start a new business, can I plug my new business under my pre-existing company?
- How can I ensure that my business is compliant with the Personal Data Protection Act?
- What should I consider when planning to do business with overseas companies?
Planning to start a business
What should I consider if I’m planning to leave my current employer to start a similar business?
Ying: I would always say proceed with caution.
Two things to take note of:
#1. Don’t take any information from your current employer, particularly if the information can be construed as confidential. What exactly is confidential? Very often, this depends on the factual matrix. But if you think it’s something that is important, it’s likely to be confidential.
#2. Your employment contract. If you’re planning to start your business while you’re still employed, there would be a conflict of interest. Even if you don’t have a contract, there might be a breach of common law duties as an employee.
As to whether you can solicit clients or current employees, it depends on the non-competition and non-solicitation clauses stated in your employment contract. Of course, you may have built up relationships with existing clients over the past years who may come to you out of their own volition.
I always tell my clients who are thinking of starting a similar business or joining a competing firm to review their contracts and make sure they don’t do anything that will harm their existing employer.
For example, they should not perform badly on purpose so the client will get upset with their current employer. You may get sued and if you already get sued when you are just starting a new company, it will affect your business regardless of whether there’s merits in the claim.
Samuel: Non-compete clauses and non-solicitation clauses are very common these days. These usually are circumscribed in terms of time, for instance three months, six months or one year.
On the receiving end of these clauses, you need to know that these clauses can only be enforced if they are reasonable. Reasonable in terms of duration, activity and geography.
For instance, perhaps you’re starting a business that is overseas and your employment right now is in the same area and industry but only in Singapore. If your current company has not ventured overseas and will not do so, a clause that seeks to prevent you from starting a similar business in other parts of the world is unreasonable. It is likewise unreasonable from stopping someone from engaging in an activity for five years if he has only that one skill after working so long.
If the court can’t cancel out parts of the clause to make it reasonable, the whole clause will be struck out. But do you really want to take that risk?
Even if there are no non-solicitation clause in your employment contract, don’t poach your immediate past employer’s clients. There’s nothing wrong with informing clients after you have left that you are employed elsewhere now, but don’t invite them to join you.
Don’t forget that these clients might have contracts with your past employer. You might be accused of inducing breaches of these contracts if they said they were invited to go over.
When and how should I leave the job, if I’m looking to start something similar in the industry?
Ying: It’s a tough question because there aren’t really any legal issues involved.
Do it with a clear conscience. When you’ve already set up the preparations for your departure and you’re confident, then that might be a good time to move. Of course, you have to do a proper handover when you leave. If you don’t, your former employer may sue you for leaving their company in a mess.
There’s no hard and fast rule as to when and how you should leave, but leave properly. Don’t take what belongs to the company, even seemingly minor data like clients’ names and their contact details.
What do I have to consider if I want to start my own consulting company?
Ying: In Singapore, it’s not a problem to be a sole shareholder or director. If you’re just starting up and don’t want to invest too much capital, my advice is to find a good corporate secretary.
The amount of taxes you have to pay depends on what you pay yourself.
If you pay yourself a salary as an employee of a company, you would have to pay personal income tax. But as a shareholder, you’ll get dividends out of your profits. As dividends are already subject to corporate tax, you won’t be taxed personally.
Samuel: To best strategize this, you may consider how much tax you’ll be paying if your earnings are reflected as personal income. You may be making so much money that your personal income tax rate is higher than the corporate tax rate. In which case, you might want to take them up as dividends instead and pay yourself a low salary.
Or perhaps you’d rather pay personal income tax if you think the corporate tax rate is very high and that your income is not very much anyway. That’s another consideration.
If I want to start a business with 5-10 employees, how should I structure my business?
Samuel: It really depends on what kind of business you’re running and what kind of liabilities you think you’re going to be exposed to. You must also think from a tax perspective because you do get some incentives for the first few years.
The fees for incorporation are not expensive. It can be done pretty quickly and your liability is generally limited.
Why do I say generally limited? The default position is that the company, in the eyes of the law, is a separate person altogether. Which means that you and your company, notwithstanding that you might hold 100% of the shares, are viewed as separate legal persons.
Whereas if you run the company as if it is you, that you are the company, then people may go after you directly instead of the company.
My preference is always to incorporate because you have to think long term as well. If you start of as a sole proprietorship, it may be easy and efficient and transparent. But as you grow, will you eventually set up a company and transfer the assets that you acquire there?
Singapore has made it very easy for people who want to explore having side-businesses and multiple businesses. Companies need not be big, giant structures; you could run a stall in a coffee shop and it could be a company.
So I think people need to get that misconception out of their minds that companies are something very official. Yes, there are requirements that you need to satisfy to set up a company. But by and large, it’s not exceptionally difficult.
Ying: There are a lot of incentives and grants that the government is providing now for tech companies and companies in traditional industries. So, there are a lot of plus points when it comes to incorporating a company.
It’s very common now to get corporate secretarial and accounting services at a relatively cheap rate. If you have an idea and you’re starting to work on it, then you might want to incorporate your company earlier than later. When you’re ready to launch, you would already have the required history to apply for grants.
Will starting a tech-related startup be much different from starting a more traditional business?
Samuel: No matter what traditional industries you’re in, there’ll be some elements of tech. It’s hard to draw a line between very traditional, non-digital businesses and purely digital businesses. You’ll end up with the same concerns. Leaving that aside, you have to comply with laws like the Personal Data Protection Act regardless of whether you are a ‘tech’ company or non-tech company.
I think the distinction from a legal perspective might be a little bit artificial as you will inevitably deal with people, and people always present problems. The problems, such as shareholder disputes, are always similar.
If you really want to draw a distinction, you can consider how tech-related businesses have to be aware of certain regulations. For instance, Fintech companies must be compliant with MAS regulations, whereas these regulations might not be relevant for very normal, ‘non-tech’ businesses.
Perhaps the major concerns for so-called more traditional businesses are more employment based. For example, if you’re running a restaurant that is centred around a chef, you would have to consider what to do if the chef wants to leave your employment.
Ying: Tech-companies are still companies. Eventually, companies would have to consider the same issues, for example intellectual property protection and branding. Perhaps the technological aspect may become relevant when considering who owns the company’s website.
As with every company, you have the same basic concerns. Get your shareholding and employment issues sorted out.
Before I start my business, should I patent or copyright my business idea and procedure? If I have to apply for intellectual property protection, how much will it cost and how long will it take?
Ying: One’s ideas cannot be copyrighted, so what we can protect is how the idea is expressed.
For copyright, there’s no need for registration in Singapore. After publication, copyright generally resides with you as long as you can prove you are the author.
Be very careful when using copyrighted material for your business. Even if you have acknowledged the copyright holder and included the relevant credits, you’re still infringing technically if you haven’t asked for permission.
In fact, some big image companies send out a lot of letters of demand for copyright infringement. So if you don’t have a license to use it, be safe, don’t use it for commercial purposes.
For patents, you have to be very careful. You would lose the right to patent it if it’s out in the public domain.
If you seek advice from a lawyer, that’s not out in the public domain. If you have a closed-door discussion with professionals and specialists in that area, that’s technically not in the public domain. But once it’s out in the open, the likelihood of getting your patent approved is reduced dramatically.
Patents can also apply to processes or enhancement to processes like for making fake diamonds. There’s a few patents for that. The idea itself cannot be patented, but there’s different ways of doing it.
You must understand that intellectual property, particularly for patents and trademarks, are territorial. If you’ve registered for a patent here in Singapore, it doesn’t mean that you can enforce it in other countries. But you may be able to register in other countries using the same base documents.
As for timelines, be prepared to wait about 2-4 years, depending on whether you receive any queries from IPOS. How much it will cost depends on the time that the patent agent spends to draft the elements in the patent.
Working with lawyers
Should we send our lawyers to negotiate with our co-founder?
Ying: I have given advice to founders in the background. Normally, just speak to a lawyer and know what to say to the other party before signing a contract. Very often, I have clients who have already made promises to the other party and there’s nothing I can do as their lawyer.
Samuel: There’ll be aspects of your business that you’d know much better than your lawyers. Lawyers might serve to protract negotiations, perhaps leading to increased fees all around when things could have been easily settled between you and your business partner.
It’s of course important to have lawyers in the background. Before the meeting, go in knowing your rights and know what you can perhaps give up and what you must hold on to.
If you manage to find some common ground with the other party and agree to document the terms, both sides can engage a lawyer’s help to avoid the potential complications which may result from drafting the documentation themselves. I think that might be the best way to conduct negotiations with a lawyer’s help.
Is it acceptable for lawyers to give business advice?
Ying: I think that’s a personal preference for lawyers. I would think as a responsible lawyer, I have to make it very clear when my advice is legal in nature and when it is an opinion of my own that has nothing to do with the law. I can tell you what my experiences are, but ultimately it is up to you to make a commercial decision for your business.
Preparing legal documents
How should I split the shareholding of my company if my investment comes from family members, and how should I do so if my investors are VCs?
Samuel: It’s always a tricky situation when family members are involved. Sometimes to appease everybody, the documentation leaves much to be desired or is completely non-existent.
To protect everybody, it’s in everybody’s interests to get their documents right from the get-go. You should still prepare deadlock and exit mechanisms as if your shareholders are strangers. The content of your shareholders’ agreement may be different, but the categories of your documentation would still be the same.
When it comes to VCs, your bargaining position is very different. They are the big boys coming to you.
It comes down to commercial considerations. If you’re uncomfortable with oppressive clauses from VCs and still think your idea is in the developmental stages, you may still want to retain a lot of control over it. Perhaps you’d rather bootstrap your way to your series A or to your seed even.
Now for shareholders’ agreements. Some people would use a very bare template at the start and amend as they go along. It may be cheap and efficient, but sometimes their business takes on a life of its own and it becomes so successful that things just spiral out of control. The thing with sweeping problems under the rug is that one day, the bump is so big you’ll trip and fall.
My preference is for documentation to be clean from the get-go, because otherwise you’ll spend more money later trying to right the errors of the past.
What is the best way to formalize a partnership with potential partners and co-founders?
Ying: You would first need a shareholders’ agreement. You can get templates, but I always say that a lawyer’s value add is not in the template.
The lawyer’s value add is in understanding what your business is, what your vision for the company is, and who your other partners are.
Is it necessary for SMEs already in operation for 1-2 years to review their legal documents?
Ying: If it was done properly at the start, the review may not be so painful. It really depends on whether you are looking for an investment in future and looking to grow your company.
These considerations would determine how much resources you’re going to put in to straighten out your legal due diligence. If you’re looking for an investment in two to three years’ time, you’ll have to make sure everything is done nicely. Otherwise, you might want to put your resources in other portions of your business.
Legal is just a very, very small portion of how a business is run. Ultimately, it’s both defensive and offensive. Defensive as in making sure you can concentrate on running your business, for instance through reducing the likelihood of being sued successfully.
The offensive aspect would be considering how to monetize and commercialize, using the supporting legal mechanism to achieve your goals.
Running a business
If I am already running a company and would like to start a new business, can I plug my new business under my pre-existing company?
Ying: Definitely. It will then become one of the many businesses of the same company.
Nonetheless, my advice would be to keep it clean and keep your businesses in distinct companies. Just concentrate on running your business and leave all the painful work to your corporate secretaries and your accountants.
You have to also consider the liability issue especially when you have new investors and shareholders coming in. If one of your businesses had some run-ins with the law, you can isolate that business from the other businesses if they’re in different companies.
How can I ensure that my business is compliant with the Personal Data Protection Act?
Ying: First, be aware of the regulations. Make sure you don’t fall afoul because you can get fined.
Secondly, think about how you plan to commercialize the data you’ve gotten. If you’re a non-traditional business, data at the minimal will help you enhance your products or services. At the maximum, it could be another revenue stream for you. A good commercial lawyer will tell you what is it you want to achieve and see if it falls within the confines of the law.
What should I consider when planning to do business with overseas companies?
Samuel: When you do business with parties that might be overseas, you have to know that law is territorial. That means that your contract will be interpreted based on the law which governs your contract. For example, as Singapore qualified lawyers, we can only advise on issues of Singapore law. So we’ll always prefer that our clients’ contracts are governed by Singapore law.
You may also have a clause stating the choice of jurisdiction which indicates who gets to decide to hear any arising disputes. This means that the dispute may not be confined to only the courts of Singapore. For instance, if your counter party is based in South Africa and you manage to win a suit against them in Singapore, that judgment may just be a paper judgment if your counter party has no assets in Singapore to enforce a judgment on.
Would you really want to spend more legal fees to get your paper judgment recognized in South Africa and enforce it on your counter party’s assets there? It might make more sense for you to have your legal documents governed under the laws of South Africa if that’s where having a judgment would hurt them most. But that would also mean that Singapore lawyers might be out of the picture, unless you engage us to instruct foreign counsel. That would result in engaging two sets of lawyers.
At the start of their business, most people would rather run the risk and learn their lesson to either not return to that jurisdiction or to not engage the same supplier again.
If you would like to seek legal advice for starting your own business, you can do so by booking a Quick Consult. When you get an AsiaLawNetwork Quick Consult, a lawyer will call back within 1-2 days for a transparent, flat fee starting at S$49 to give you legal guidance and answer your questions.