February 01st, 2019

Legal Talk 2: My First Few Basic Legal Questions

You are on the phone to me with 2 quick questions. You say it's a bit embarrassing to ask anyone these questions because you are a leader at your company and so you fear that asking these kinds of questions to co-founders, directors, shareholders or investors might make you look weak or naive. But how are you supposed to know this stuff? Your questions are as follows: 

Question 1: You can't understand why your lawyer won't give you detailed tips or hints on how to deal with your individual shares. You are thinking of hiring them but they said something about them being hired by the company which you found a bit puzzling. 

This is a question that comes up all the time. It is quite simple. You and the company that you set up are different legal entities. Yes, at the start you might be the only person involved so you and the company (in your eyes) are one and the same thing. BUT, as soon as you get other shareholders and investors involved then they have a slice of your company. So, your company and you are then not really the same thing in that the company's interests (i.e. the interests of the shareholders and investors that own a slice of it) may not be exactly the same as your interests. 

Maybe an example would help. Say on day one you are the only person involved in your company. If the company is making some money you can decide how much you decide to pay yourself and no one will really complain. You could pay yourself pretty much all the profit the company makes. But, as soon as you have shareholders and investors, they may take a different view and start querying how much you are getting paid, particularly because they now have a slice of the company (and more for you might mean less for them). 

So, what your lawyer is saying is essentially that (if you hire him to help you with the company) then he is working for the company and not you. For example, if you want the company to pay you $5000 for some work and the company (made up of you, investors and other shareholders) only want to pay you $1000, the lawyer is saying he will be arguing for the company's side and not yours.

Question 2: The lawyer mentioned something about limited liability. Not sure what this was about. Can you shed some light on this? 

In general, if your company is trading then liability refers to the amount that those who trade with your company can recover from the company. In a start-up, there won't be much that the company owns and so there is not much for creditors to recover if the start-up does not pay or does not comply with its obligations under a contract. 

As for you, as a director of the company, in general terms you will not have any liability for the company (i.e. creditors can't come after you for your personal assets) but you can't act illegally or recklessly when running the company or act in a way where you are just using the company as a shield to deliberately do your bidding whilst knowing full well that if things go wrong then you will simply blame the company. If you as a director deliberately run up massive debts and liabilities in the company's name, which you are aware that the company cannot meet, then use the company as a shield, creditors might be able to go after you and your personal assets. This is a tricky area and so do look into this more but the bare bones are as I have explained. 

You say thanks and that this has been a good starting point and that you will look into the two points more.

Looking forward to our next meeting. 

With kind regards,

Jimmy Desai
Your Legal Coach

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