Setting up a new business is an exciting time, full of anticipation and fabulous ideas. At this point of time there are a number of big questions for a new business.
Funding, location, IT and IP as well as contracts for the business itself, employees and directors and also with suppliers. It is no wonder new businesses often do not give enough consideration to the vehicle, or business structure, they are going to use. Many people do not realise there is a choice and are not clear on the benefits and downside to the different options.
There are four main business vehicles: sole trader; partnership; limited liability partnership (LLP); and limited company.
There are advantages and disadvantages to each as they will see.
A sole trader is just as it sounds – one person running a business. The sole trader can set-up very quickly which is one of the advantages. There is no need for registration of the business, except with HMRC. The sole trader pays tax through Self-Assessment, therefore, if they have not previously been self-employed, self-assessment registration through HMRC will be necessary. This can be done on-line and most of the information required can also be submitted on-line. If the business is going to have a turnover of more than the current VAT threshold (which is £85,000 at this date) then the sole trader must also register for VAT. Again, this can be done through the HMRC website and is done electronically.
The sole trader should identify a business name. There is good reason to avoid existing business names. Names and logos which have already been trademarked can be checked on the Intellectual Property Office (IPO) website. Companies House can also be searched to establish if there are any companies which currently have the name of the business intended to trade with. If so, it may be advisable to change the name. Even if a business has not registered a trademark with the IPO, if the business is using the name they will still have some rights to it. Not every name is capable of being registered with the IPO and that should be checked before registration is attempted. A general Google search will also throw up information on anyone currently trading with that business name.
A partnership is “two or more persons coming together” with the intention of carrying on a business and making a profit. This dates back to the Partnership Act 1890. The partnership does not require any formal constitution. It is, however, advisable to have a partnership agreement in order that if there is a dispute matters can be resolved quickly and easily. It is not uncommon for partners to believe they will never fall out and there will never be an issue. Sometimes they are related or best friends. Unfortunately, it is still the case that disagreements occur and these should be provided for. A partnership could also be affected by ill-health or incapacity of one of the partners and agreeing at the beginning what will happen in those circumstances makes everything less stressful and much smoother for everyone involved. It is advisable to consult a solicitor and have a partnership agreement prepared. While there are on-line versions available some of these have English law references, and it is best not to use a style as this may not cover everything which is relevant to your business. Discussing a partnership agreement with a solicitor means you can look at the things which are unique to you and your business and ensure these are included.
A partnership does not require to be registered and the individual partners pay tax through their Self-Assessment. The partnership itself has a separate legal personality and must lodge a set of accounts with HMRC – this is as well as the Self-Assessment done by the partners. While a partnership has a separate legal personality, namely “the partnership of …” that is made up of the individual partners. One of the downsides of a partnership is that each individual partner is jointly and severally liable for the debts and liabilities of the partnership as a whole. This means unlimited personal .liability for each partner. Joint and several liability means each partner is responsible for the full amount of partnership debts – so if a partnership has debts of £200,000 then each partner is liable for the full amount. While a creditor would not expect to recover the whole amount from each party, the creditor can choose who it wants to pursue for the outstanding sum. If one partner has assets, such as property, but another partner does not have assets, the creditor can choose to recover all sums due from the partner with assets. This takes us back to the partnership agreement where the individual partners can agree responsibility to each other. It still does not help significantly where the assets of each partner are not equal. There is only benefit in raising an action against someone to recover money from them if they have assets or money and are able to pay you. Limited Liability Partnership (LLP):
If a partnership is appealing, but the prospect of unlimited liability is not, a LLP is another option. This is very popular choice among professional services firms as it allows a number of partners, maintaining the old fashioned partnership model, but restricts the liability. There are some additional costs with a LLP as it does require to be registered at Companies House. That now takes a only couple of days so there should be little delay. An LLP requires two designed members who take the majority of the responsibility for lodging documentation on time. The LLP has a constitution similar to Articles of Association and an internal partnership agreement is still advisable. An LLP has to be incorporated and it needs 2 or more members, just like a traditional partnership. A “member” can be a person or a company.
As with other businesses, a name must be chosen. As this must be registered with Companies House the name cannot be too similar to a name already registered (with certain exceptions) and must not be offensive, use sensitive terms and similar.
The registered office address is the LLP’s official address. This is where all written communication should be sent so if you chose a third party address, such as a mail centre, your solicitor or accountant you must make sure they will provide a service to pass on your mail. This is the same for limited companies. .
The registered office address must be a physical address and in the same country that the LLP is registered. A Scottish LLP or limited company will have “SC” before the company number and the registered office must be in Scotland. A PO Box can be used but a physical address and postcode after the PO Box number have to be included. A home address can be sued but that means it will be public information.
Each member pays tax on their share of the profits, as in an traditional partnership. Members are not personally liable for any LLP debts, just as with a limited company.
A limited company has to be registered at Companies House and in doing so must apply SIC code. This means that each company has its own label which confirms what purpose that company was set-up for. This is important if a business wishes to separate itself into different entities, for example, one to hold property or leases, another to trade and another to hold licences and other permissions. It is important if a company is set-up with a SIC code that it is used for that purpose, or that the code is changed.
In terms of the business name, registering a limited company is one way to establish the sue of the name, even if the trademark is not registered.
A limited company has directors (who deal with the day to day operation of the company) and shareholders (who own the company). Before setting up a limited company there are a number of considerations such as: who the director(s) will be; who the shareholder(s) will be; how many shares will be issued and what value will they have; will all the shares have the same rights or will some be allowed to vote only and others have a dividend only; and what information will the Articles of Association contain? The Articles regulate the day to day operation of the business under the control of the directors. Directors have fiduciary duties, which are responsibilities placed on them both in terms of the Companies Act 2006 and under Common Law (previous court decisions). While directors are regulated by the above they do have wide decision-making powers for the day to day operation of the company.
Sometimes a managing director or principal owner does not want all directors to be able to take decisions. If there is a restriction to the director’s day to day decision-making power that should be reflected in the Articles. Model Articles can be used, however, these are not always suitable, particularly if there is a desire to restrict directors’ decision-making powers and/or if there is only one director. The Model Articles do not deal with that situation particularly well.
Setting up a company does require some attention to detail and some planning and while that can incur some additional costs, those involved benefit from limited liability. Directors are not personally liable for the company’s debts and liabilities unless the director has acted fraudulently or in material breach of fiduciary duties. There are other limited circumstances, however, on a general basis directors do not have personal liability. The shareholders are only liable for the face value of their shares. Once those shares are paid the shareholders do not have continuing personal liability beyond that sum.
Another thing to think about are contracts. This may be for employees, therefore employment contracts, or those for directors or senior management team who are employed, called service contracts. Bear in mind a director is not necessarily an employee but if they are employees, they should have a written contact ad there may also be supporting documentation such as policies and/or an employee handbook.
There may also be contracts needed for the business to lay out its terms and conditions when contracting with other people or businesses – whether that is clients/customers or suppliers.
For assistance with business types or structure, help with contracts and terms and conditions or written shareholder or partnership agreements, please contact Jo Millar in our corporate department on 0141 370 8116 or firstname.lastname@example.org