Setting up a Business

When considering establishing a new business a number of questions, not necessarily obvious, need to be addressed at the very outset, and they nearly all have a bearing on the ultimate success of a new business venture.  The legal issues which will need to be considered range from the formation of the trading vecilce to the acquisition of premises, employment and intellectual property rights.

Further, there are numerous commercial considerations, ranging from having appropriate terms of trading to the benefits of "Keyman" insurance.

Business Structure and Formation
What are the options for the types of business structure available?  In essence, the choice is between sole trader status (or partnership for more than one individual), or incorporation; either as a limited company or a limited liability partnership.  In considering the advantages and disadvantages of these options, someone starting a new business will wish to ensure as far as possible that:

• Personal and domestic assets are safeguarded, and that the family's financial position is protected in the event of illness or death. 
•  Adequate finance can be obtained for establishing or expanding the business. 
•  Taxation liabilities resulting from business activities are (where possible) minimised.

To trade as a limited company, rather than as an individual or in partnership, may sometimes help achieve such objectives, but it will often also involve disadvantages and extra costs.  No decision should be taken without adequate professional advice.  What is set out below, is an "at a glance" guide to the distinguishing features of the commonly available business structures, followed by a checklist of some of the more significant advantages and disadvantages to be weighed up.   

1.  Sole Traders
Trading as a sole trader is the simplest form of business structure. An individual who undertakes a trade in their own name (or using a trading name) is said to be a "sole trader".   

Advantages
• There are few legal formalities to setting up in business. 
• You are the sole owner and recipient of any profits of the business. 
• The accounts you keep do not have to be audited professionally and there is no requirement for them to be made available to the public.
• Business losses can be offset against other income for tax purposes, and there may be short term tax benefits if initial profits are likely to be low.  

Disadvantages
• You are personally answerable for all  business liabilities and such liability is unlimited.  Your personal property and assets could be at risk.
• You pay self-employed tax and national insurance contributions, limiting the benefits to which you are entitled.
It should be noted, however, that it is not difficult to transfer a business to a limited company  from an individual who has traded as a sole trader.     

2.  Partnerships
Where two or more individuals set up business together a partnership arises.  Generally speaking, there are more similarities than differences between sole traders and partnerships, although there is one major difference which is important. This is that the liability of partners (which is again unlimited) is "joint and several".  This means that if a partnership is unable to repay a debt from the assets of the partnership, the creditor can pursue either one of the partners for that debt, regardless of the size of that partner's share of the business.   

Whilst there are no formal requirements for setting up a partnership, our advice is that a formal partnership agreement should be drawn up. This should deal, amongst other things with; the share of capital and/or labour to be provided by each partner; how business control and profit/loss are to be shared amongst the partners; and the procedure to be followed on admitting or dismissing partners, or the partial or complete dissolution of the partnership.   

Advantages
A partnership is fairly easy to set up (though a formal agreement is highly recommended).

• The partnership’s accounts do not have to be audited professionally (with some     exceptions depending upon the nature of the business) and there is no requirement for them to be made available to the public.
• Partners pay income tax (rather than corporation tax) on the profits which can, in certain circumstances, have tax benefits. 

Disadvantages
• All partners are jointly and severally liable for the debts of the partnership. Their     personal property could be at risk. 
• Limited companies offer more flexibility in relation to investment. 

3.  Limited Companies
A limited company can be formed easily, either by issuing the relevant documents to Companies House or buying an "off the shelf company" (which has not previously traded) from a company formation agent. A limited company is a separate legal entity from its shareholders and directors and can enter into contracts and incur liabilities in its own name. Where more than one person is to be a shareholder in the Company, our invariable advice is to ensure that a comprehensive shareholders’ agreement is entered into, which governs the relationship between the shareholders.    

Advantages
• The company is responsible for its liabilities; individual shareholders are only liable to the extent of their investment in share capital.  Income tax is paid only on salaries or dividends drawn from the company (and no income tax is paid on profits retained  within the company - though the company will pay corporation tax on all of its profits). 
• Capital for the company can be raised by issuing shares.  A company can be more     flexible in the giving of security for loans.
•  The ownership of the company can be expanded more easily.

Disadvantages
• Setting up a company can be more expensive than starting as a sole trader.
• The business is subject to the regulations imposed by the Companies Acts, and it is necessary to file annual returns and company accounts. Certain companies are liable to have their accounts audited. 
• Loans can be more difficult to raise because of the company's limited liability.  If the directors are asked to provide personal guarantees, one of the advantages of limited company status is at least lessened.
• The company's accounts become open to public scrutiny once they are filed at Companies House. 

4.  Limited Liability Partnerships (LLPs) 
Since the introduction of the Limited Liability Partnerships Act 2000 it has been possible to form an LLP. An LLP is a partnership which shares many of the advantages of a limited company. Importantly, an LLP enjoys the benefits of limited liability and the partners are only liable to the extent of their investments. An LLP is formed by submitting the relevant forms to Companies House and it is highly recommended for the members to enter into a comprehensive members' agreement.    

Advantages
• An LLP is taxed as a partnership but is seen as a separate legal entity so the partners' personal assets are not at risk in the same way as a traditional partnership.

Disadvantages 
• An LLP is more complex to set up than a traditional partnership. 
• An LLP must file annual accounts and returns with Companies House in the same way as a limited company. 
 

Setting up a new company / LLP
1. Business name      
All companies and LLPs must have their name registered at Companies House and that name cannot be the same as one already registered.    The registered name must be displayed clearly at all premises which are used by the company or LLP , and at its registered office.   

2. Company/LLP stationery 

All letter headings, invoices, order forms and related stationery of a company or LLP must contain the following information:

• The full corporate name.
• Where the company or LLP was registered  (i.e. England) and the address of the     registered office.
• The company or LLP's registered number.
• VAT number, if applicable.

Responsibilities as an Employer
The legal rights and obligations of an employer are becoming increasingly complex, and it is advisable to take legal advice on the labyrinth of legislation that is constantly being added to by law emerging from Europe.     

Under employment legislation every employee should receive a written statement setting out the main terms of their employment including reference to disciplinary and grievance procedures.    Our advice is to ensure that specific employment contracts and procedures are prepared for your business which properly reflect the way in which your business is run. Further details about Warners employment law services can be found in a separate leaflet.    

Acquisition of Business Premises 
If business premises are required, they will either be purchased or rented.    A business will need to consider, amongst other things, how the purchase of the property is funded, what rights will be required, how long the premises are likely to be needed and what planning permission will be required to run the business from the premises.    

Warners has a team of commercial property lawyers who will be able to guide you through the complexities of purchasing business premises.    

Terms of Business
Almost all businesses should have specific terms of business drafted to control the contractual relationship with customers and/or suppliers. Certain legislation will need to be considered when drafting these terms of business, and it will be necessary to consider the specific types of goods or services being supplied or purchased and whether the business supplies consumers or other businesses or both.    

Warners commercial lawyers have a wealth of experience in drafting terms of business and other contractual documentation and will be able to assist you in your needs.  

Licences and Intellectual Property
Certain businesses will need specific licences to operate. Warners may be able to assist  in obtaining these licences. In addition, certain business will create or acquire certain intangible property which is used in the business. Collectively known as "Intellectual property" rights.  

Intellectual property rights can be protected in a number of ways, for example by registration or ensuring that contractual documentation is properly drafted to seek to ensure that customers, suppliers and employers do not commit acts of infringement.    

For further information on setting up a business or any other aspect of commercial law please contact a member of Warners company commercial teams in Tonbridge and Sevenoaks.