The contracts you don’t have are probably your biggest legal risk

Introduction

Often SMEs don’t run into trouble because of a bad contract. They run into trouble because there was no contract at all – or one that existed in name only.

It usually starts innocently. A founder helps out “for now”. A developer builds the product on a friendly basis. A shareholder relationship feels obvious and aligned. Everyone is focused on growth, not paperwork.

And then the business grows. Money comes in. Someone leaves. Priorities change.

That’s when the missing contracts suddenly matter – often at the worst possible time.

Why missing contracts are riskier than bad ones

A poorly drafted contract at least gives you something to analyse. You can see the risk, take advice, and decide what to do next.

When there’s no contract, you’re relying on assumptions:

• “We all agreed this was how it worked”
• “That was never the intention”
• “Everyone understood the deal”

Legally, assumptions are fragile. Courts, investors, and buyers deal in evidence – not shared understandings.

For SMEs, the biggest hidden risks rarely sit in customer contracts. They sit in the relationships closest to the business.

The founder arrangements you never properly documented

Many SMEs start with multiple founders and no real shareholders’ agreement. Early on, that feels reasonable. Trust is high, the equity split feels fair and speed matters more than structure

The problem is that company law default rules apply if you don’t override them, and they are rarely what founders expect.

Without a workable shareholders’ agreement, you may have:

• No clear decision-making rules
• No exit mechanism for a departing founder
• No protection if someone stops contributing
• No clarity on what happens to shares when roles change

This becomes a serious issue when the business hits a pressure point – investment, growth or disagreement, potentially causing delays, disputes and legal costs far exceeding what it would have cost to do it properly at the start.

The IP your company assumes it owns

Another common gap is intellectual property.

If your product, software, brand, or content was created by:

• Founders
• Freelancers
• Consultants
• Early-stage contractors

…and there’s no written IP assignment, the company may not own what it thinks it owns.

Under UK law, IP created by contractors does not automatically belong to the company. Even founders can retain personal ownership unless it is properly assigned.

This rarely causes issues day-to-day. It becomes critical when:

• You raise investment
• You license your product
• You sell the business

At that point, missing IP documentation can delay or derail a deal entirely.

Informal working arrangements that quietly become legal risks

SMEs value flexibility – and rightly so. People take on evolving roles. Arrangements change as the business grows.

The risk arises when contracts don’t keep up.

Common examples include:

• Contractors who work like employees
• Employees whose roles change significantly without contract updates
• Senior hires operating on outdated or informal terms

These gaps increase exposure to employment disputes and regulatory issues, often surfacing during due diligence or exits rather than day-to-day operations.

“We’ll fix it later” is still a decision

Choosing not to document a relationship is not neutral. Over time:

• Expectations harden
• Leverage shifts
• Renegotiation becomes harder

By the time there’s a dispute, it’s usually too late to “just sign something now”. At that point, positions are entrenched and costs escalate quickly.

What SMEs should prioritise

This isn’t about perfect documentation. It’s about focusing on the contracts that matter most.

Prioritise:

• Shareholders’ or founders’ agreements
• IP assignments from anyone creating value
• Clear terms for key employees and long-term contractors

The takeaway

If you want to understand your biggest legal risks, don’t start by asking what contracts you have.

Ask:

• Who is critical to the business?
• Who creates value?
• Who could cause real problems if they left tomorrow?

Then ask whether those relationships are properly documented.

Because for most SMEs, the biggest legal risks aren’t hiding in badly drafted contracts.

They’re hiding in the ones that don’t really exist at all.