If you have made the incredibly brave and dynamic decision to start your own business, it is imperative that you are aware of the legal requirements relating to new companies to ensure your new venture gets off to the best possible beginning and isn’t stopped along its tracks.
Key matters you need to discuss with a legal professional to get your organisation up and running include:
- The basic legal tools required to register and set up your company;
- Documents required to govern and regulate the running of your company, ie shareholders agreements and directors’ service contracts, etc.;
- Commercial contracts which govern the relationship between your company, service provides, suppliers, manufacturers, your customers and the like.
Obtaining the right advice and taking the time to have these documents drafted correctly can save you and your company thousands of pounds in the long-term.
By having correctly drafted governing documents and contracts, you are taking the first step to protecting your company for unforeseen liabilities which can occur internally, for example shareholder disputes, or externally, for example customer complaints and litigation.
Registering and Setting up a Company
Before you start trading, you will need to set up your company with Companies House (the UK’s hub for corporate entities).
There are a number of registration requirements you need to consider before setting up your company including:
Your Company Name
The name you choose for your company must be unique.
Limited company names are subject to certain restrictions and requirements under the Companies Act 2006 and the Company and Business Names (Miscellaneous Provisions) Regulations 2009.
Company names must also be free from:
- sensitive words (words that could mislead or confuse the public as to the nature or pre-eminence of your company) unless permission is sought and granted;
- suggestions of links to government departments or local bodies; and
- offensive words.
If you set up your company as a limited company, much of the information pertaining to it will be open to the public.
For example, you are required to file an annual return each year, which provides a snapshot of your company including the names of any directors and shareholders and a set of annual accounts which includes a detailed profit and loss account and director’s report. This will be publically available once filed at Companies House and the filing of an annual return is a legal requirement.
In addition, HMRC will also require you to submit a Corporation Tax return and quarterly VAT returns. You may also be required to provide an individual self-assessment.
Separately, if any details such as the address of the company or number of shareholders change, they too will have to be registered at Companies House.
Talking of VAT, if your company has a turnover of more than £82,000 (current VAT threshold), then you will need to register for VAT with HMRC. You will be sent a VAT certificate when you register. This will include your VAT number and the date your first VAT return and payment is due.
You can register for VAT voluntarily unless everything you sell is exempt from VAT payments. Some companies voluntarily register as it allows them to reclaim VAT and create an impression that the company is bigger than it really is…
Registration of Trademark or Logo
To protect your company’s brand, you should consider registering its name or logo as a trademark. This will ensure that you can take legal action against anyone who uses, sells or licences the trademark (company name or logo) without permission.
Basic Corporate Governance
For a company to run smoothly and avoid costly dispute / litigation costs, as a starting point, it is wise to spend the time and money to ensure the agreements which govern the directors and shareholders are drafted correctly.
Agreements you need to consider implementing include:
- Shareholders’ Agreements
A shareholders’ agreement is a contract between the shareholders of a company which governs how decisions are made between them. A good shareholders’ agreement will contain clauses covering voting rights, the appointment of new shareholders, profit sharing, the rights of minority shareholders and dispute resolution.
You can read more about shareholder’s agreement here.
- Cross-option Agreements
Cross-option agreements allow the fellow shareholders of a deceased shareholder, to have the option to buy his or her shares (and, in some cases, those of his or her spouse), usually at market value (a so-called ‘call option’) or even allow his or her personal representatives to have the option to sell his or her shares (and, in some cases, those of his or her spouse) to his fellow shareholders (a ‘put option’). This provides security and continuity for the company in the event of a death of a shareholder.
At the same time, each shareholder takes out a term assurance policy, pursuant to which any amount payable under the policy is held on trust by the fellow (surviving) shareholders to pay for the deceased’s shares under the put and call options provided for in the cross-option agreement.
If shares are transferred in this way, it is possible to ensure that the deceased’s shares qualify for business property relief (which, in valid circumstances, provides 100% relief from inheritance tax) whilst the proceeds of the insurance policy fall outside of the deceased’s estate and are not subject to inheritance tax.
- Director’s Service Contract
A director’s service contract governs how a director will perform services for a company. It will usually include clauses to cover the duties of the director, remuneration (including bonuses) and any covenants relating to his or her appointment (such as not being able to serve on other company boards whilst working for the company).
You can read more about director’s service contracts here.
Having watertight commercial contracts is vital to the success of any business. They protect you from wasting time and money on disputes based on misunderstandings regarding delivery and cancellation of goods and services, confidentiality, licences or whatever that matter may be.
Examples of common business contracts include:
- Manufacturing Agreements
A manufacturing agreement is a contract between a company which has developed a product and the manufacturer who will build it. It sets out the terms of how the product will be manufactured and covers issues such as product specifications, delivery deadlines, payment and payment terms and the importing and exporting of the product and importantly, provisions protecting your rights to the product.
- Licensing Agreements
Licence agreements are agreements which deal with any licences that the company gives to third parties to use trade secrets, patents, trademarks or other intellectual property. An example of where a licensing agreement is required is where a fashion retailer enters into an agreement to manufacture T-shirts with the characters from a children’s movie featured on them. The company will usually receive a fee based on profits that are made as a result of granting the licence.
- Confidentiality agreements
Confidentiality agreements should be entered into with every party a company deals with to ensure the protection of its business information and trade secrets. These are also known as non-disclosure agreements (NDA). If you enter into an NDA, and your confidentiality is breached, you will be able to claim damages from the disclosing party.
By ensuring you take full advantage of the legal tools available to protect your company when you start your own business, you can save yourself a lot of lost profit, (not to mention stress) by ensuring disputes resulting from miscommunications are either unlikely to arise or managed properly.
Saracens Solicitors has years of experience in negotiating, drafting and enforcing company and commercial agreements. If you would like any legal advice on issues mentioned in this article, then please call us on 020 3588 3500.
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