Entrepreneurs are simply those who understand that there is little difference between obstacle and opportunity and are able to turn both to their advantage” – Niccolo Machiavelli.
Unsurprisingly, the recession has caused many budding businesses owners to lose confidence in an economic climate where dipping sales have become the norm. For entrepreneurs and for the established business owners, tying to run a successful / profitable business is not only challenging but takes real courage.
In the same vein others have seized the opportunity realising rents are low, staffing costs are low and have increased their level of creativity and innovation to capture new business that others are missing.
For the determined among you, we have produced a series of blogs created by Saracens Solicitors commercial department to assist when starting up a business. This series will focus on certain legal issues to consider when setting up a business, the daily activities of a business as well as ongoing expansion
The titles in the series include:
- Getting started
- The first year in business
- Commercial agreements
- Business protection
- Growing your business
- Business health check
In our experience we have found that many business owners have overlooked the importance of having a proper business plan, which is similar to starting a journey without a map. Losing your way is highly likely but for a business owner this is valuable time that has been wasted.
One of the questions that our clients ask us is whether it is beneficial to have a bespoke business plan? This of course will depend on the circumstances of the business and the intention of the individual driving that business
A business plan is a formal document which sets out the vision, ethos, goals and how these goals will be achieved by the business. The commercial value of this document is often underestimated – for a new company this document is often used to obtain financial support from investors or a loan from a bank.
We would advise an individual starting a new business to think carefully about their business plan and seek the assistance of a commercial solicitor.
Another decision that a new company will need to make is the structure in which to carry on its business. There are many different ways of carrying on a business which will determine the liability, responsibility and the tax that a business will have to pay. It is essential for all businesses to obtain legal advice and tax advice at the outset to find the most suitable structure for their business.
We have listed a number of business structures below:
This is an individual who runs their own business without a corporate structure, per se
The business owner will keep all profits that the business makes after tax has been paid. The individual will have unlimited liability for the debts, bills and other expenses that the business incurs.
A sole trader is only established when the business is registered with HM Revenue & Customs by completing the relevant forms.
Private Limited Company
This is made up of a group of individuals who make up the company. The company is managed by directors who make decisions on its day to day activities through their conduct. The directors are not only accountable to the shareholders who have a financial interest in the company but also to members of the general public. It is not unusual to find that the directors and shareholders are often the same individuals.
The company is responsible for its own affairs, which means that the personal assets of its shareholders remain intact. The liability of the shareholders is also limited to the value of the shares that they own. The profits of the company are shared after it has paid corporation tax and other liabilities that it owes.
Company formation is completed through registration with Companies House. The company must also inform HM Revenue & Customs when it starts operating.
In this structure there is an array of legal issues for shareholders to consider that a commercial solicitor will on occasion have to advise on. The Companies Act 2006 regulates the conduct of directors, but is silent on the relationships of shareholders and how they treat each other. The questions that often arise are:
– What happens if one of the shareholders dies?
– If a shareholder wants to attract external investment by another shareholder, what rights do other shareholders have to stop this? If this is not resolved, is there a possibility of litigation?
– Where there are conflicting views amongst the shareholders, how are these views harmonised?
– Does a minority shareholder have any rights if a majority shareholder seeks to dilute their shares for their own benefit- more importantly, can this action be stopped?
This topic will be discussed in further detail in our 3rd blog of the series, titled “Commercial Agreements.”
This consists of two or more individuals who share equal responsibility for the business and share its profits. Each partner pays tax on their individual share of the profits. The partners are responsible for the losses, expenses and bills that the business incurs.
A key distinction here is that a partner does not have to be an individual and can be a limited company.
Limited Liability Partnership (LLP)
An LLP is a company which is independent of its members, giving the partners the right to manage the company directly unlike the shareholders of a company who would have to appoint a director onto the board.
The partners are not legally liable for the actions of the other partners and the partners cannot be held jointly liable. The liability of the partners is limited to their individual investment in the company and they pay tax on their individual share of the profit.
Public Liability Company (PLC)
This is a company whose shares can be traded on the stock market. The shares in the company can be bought and sold by members of the public, and their liability is limited to the value of their shares. This company structure is strictly regulated and two or more individuals are required to form the company.
Alternative Business Structures (ABS)
Even solicitors are not removed from considering the nature of their business structures. On the 6 October 2011 for the first time in English legal history non-lawyers were permitted under the Legal Services Act to own and manage law firms, a role traditionally restricted to qualified individuals.
For many this was received with an “about time” and saw the opening of the English legal system as an avenue for choice and healthy competition. For cynics the risk of the quality of legal services being diluted and customer care has been too much to bear.
We hope that this section illustrates the importance of obtaining legal advice from a commercial solicitor when considering a business structure.
There are essential documents that a business must have for company formation. These documents include the following:
Memorandum of Association
This is the company charter which defines the scope of the company activities.
Articles of Association
This specifies the internal regulation (including rules and processes) of the company for carrying out its activities as defined in the memorandum.
The main difference between the two documents is that the Memorandum of Association cannot be altered except as provided by the Companies Act 2006, while the Articles of Association can be altered by a special resolution signed by the members of the company.
A number of our clients have mentioned obtaining “of the shelf articles” from the internet, without giving consideration to issues such as “pre-emption rights”. If, for example, 2 shareholders own equal shares in a company, the default position is that one of the shareholders would be able to transfer their shares freely without having regard to the other shareholder. In owner-managed businesses, having a right of first refusal for share transfers can be particularly important. Such rights can be inserted into a bespoke set of articles which we can draft.
Certificate of Incorporation
This is a certificate issued by Companies House confirming the existence of the company and the date of its incorporation.
Until next time
It is evident that having a business at any level can be challenging. The following titles in this series will focus on the first year in business given that statistics prove that many businesses fail within the first five years.
If you are thinking of starting your own business you must consider how to structure the set up and the points detailed above. Even if you are already in business you may want to change your commercial structure, e.g. from a sole trader to say a limited liability company. In these circumstances, the above details may prove to be helpful and you should seek professional guidance on how to go about it.
Our commercial lawyers are on hand to assist – feel free to give them a call.
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