STARTING UP A BUSINESS
+ What to consider when starting a business
It is often the case that startups focus all their efforts on getting their service or product off the ground and that’s understandable. However, it’s also a reality that a large proportion of our clients come to us to help them get out of sticky situations that end up costing more time and money than it would have to prevent it in the first place. Simple steps like getting your contracts checked or setting out your business terms in a written agreement with your clients can save pain, time and money in the long run while giving you the peace of mind that you are doing things the right way.
Here are the eight priorities we think you need to consider before you start your business:
1. Business Structure
Your business structure affects how much you pay in taxes, your ability to raise money, the paperwork you need to file, and your personal liability. The most common business structures are acting as a sole trader, a partnership or a limited company. Each of them have their own advantages and disadvantages. You need to carefully choose the business structure that is best suited to your trading and your needs.
2. Shareholder Agreement
One of the most common reasons companies fail, is a disagreement between the shareholders or co-founders. Even though there is no legal requirement to have a formal shareholders agreement, every company with more than one shareholder is well advised to have one. Having a shareholder agreement in place, ensures that the responsibilities of the shareholders are clearly stated, there is clarity and certainty as to what can or cannot be done and decisions are taken by consensus and discussion. It is also a way to create incentives to motivate a shareholder to act in the best interests of the company, for example by introducing a vesting schedule and specific milestones. A shareholder agreement like any contract, will reduce the potential for conflict between shareholders and help the company to be run smoothly.
Having a shareholder agreement will impress investors who will be more likely to invest in a business where these legal documents are ready and signed.
4. Business Terms
The commercial objectives of a business require clear terms and conditions to be in place and agreeing on a set of terms that you will work against with your clients or suppliers is imperative to the successs of your business. Practical issues such as cashflow for example, can be severely impacted if this is not taken seriously. The founders must always remember that the only proof a business can rely on is what is in writing.
Ensure that your terms specify exactly what you want them to. This is often easier said than done however, uncertain terms can put your business at risk. Both parties should know exactly what the contract means. The very exercise of drafting your business terms will be useful as it forces you to think about specifics and uncover potential pitfalls that you may not have though of before. A business will operate smoothly if the parties understand their duties, rights, roles and responsibilities.
The most important things to include in your business terms are a clear definition of the relevant products and services, payment terms, guarantees and warranties, relevant service delivery timelines, what happens when things go wrong, the duration of the agreement and what happens after the agreement has terminated.
While it is important for every business to look after its clients, it is also crucial for the founders to look after themselves and the business in terms of any possible risks in the future.
The law says employers liability insurance is essential. This will cover any claims made by employees if they are injured or suffer any damages due to working at your business.
Professional indemnity insurance is also a good idea. Nobody likes to think about it but mistakes do happen - this type of insurance can help protect companies being crippled by compensation claims. Litigation is expensive and so insurance can be taken out for any legal costs that you may incur to defend a claim.
6. Protecting your Intellectual Property
Before you begin to launch products and raise awareness about your brand, you will need to ensure that your businesses core assets are safeguarded. On an even more fundamental level, it is also wise to protect your logo, brand and domain. Registering your logo as a trademark will safeguards the visual identity that you have cultivated over time.
In the case of your domain, you may also want to consider buying similar domains to prevent potential rivals from competing directly with your business. If you have a .com address associated with your brand name, for example, you may also want to invest in the .co.uk and .net alternatives.
A final thought for protecting your IP is to be aware of valuable trade secrets. They only maintain their value if they are kept secret. Employment contracts and non-disclosure agreements specifying what is expected of employees in terms of confidential information is key. If there is ever any infringement of the trade secrets in the future, the more documented evidence the better.
7. Agreements with employees and contractors
Employees and contractors play a big part in the value of a company. Their contracts can either add to or diminish this value. Employment or freelancer contracts should specify important information such as who owns the intellectual property that is created in the course of their activities, confidentiality rules and what is to happen when the employee or contractor decides to go and work for a competitor.
8. Getting legal support
If you operate in a tightly regulated sector (such as financial services, which is controlled by the FCA) or consumer electronics, for example, you may need to employ a legal or compliance team to guarantee the integrity of your products or services. When you start out, it is also imperative that you establish a series of processes that enable you to comply with regulations as your company grows without creating too much of an overhead.
In more relaxed industries, you may be able to outsource legal tasks on the basis of each individual project, saving money and reducing your annual wage bill.
+ What legal form could my business take?
In basic terms, if you are the sole owner, you can operate as a sole trader or you can form a limited company. If your business has more than one owner, you can operate as a limited company, a partnership or a limited liability partnership.
The most suitable form for your business will depend on a number of factors: what kind of business you have, how many people are involved, how you intend to structure the internal management of your business, tax liabilities, profit distribution, and whether you intend to remove profits and reinvest them back into the business.
If you are at the stage of moving your business from idea stage to starting up, you should seriously consider getting expert legal and financial advice. The best time to get advice from your lawyer and accountant is before you set up and register the business, before you open a bank account, and before you start taking on customers.
+ What is a sole trader?
If you operate as a sole trader, you run your own business as an individual and are self-employed.
A sole trader is the simplest business ownership structure as the individual does not need to register the company with a formal constitution or submit any documents to Companies House for incorporation.
Once you have paid the applicable income tax and NI, you keep all your business’s profits. You will need to keep records of your business’s sales and expenses, Register for Self-Assessment and file a tax return every year.
However, you should be aware that as a sole trader you are personally responsible for any losses or debts of your business. There is no limited liability. So, if your business fails it can mean real personal and financial difficulties for you as the sole owner.
+ What is a limited company?
A limited company is a legally separate entity from the people who own it. The owners of a limited company are protected by limited liability and operating as a limited company can offer more operational flexibility, however there can be more of an administrative burden and cost to operating a limited company compared to a sole trader or partnership.
Many businesses start off as sole traders or as partnerships, but form a company for limited liability and flexibility as their business grows.
For businesses that make a profit, a limited company is generally a company ‘limited by shares’ as opposed to “not for profit” companies which are generally ‘limited by guarantee’.
The company will have separate finances from the personal finances of its owners and can keep any profits it makes after paying tax.
For a limited company you will need to register with Companies House. Further details on setting up and registering a limited company can be found at
+ What is a partnership?
In a partnership, you and your partner (or partners) personally share responsibility for your business.
Partners share the business’s profits, and each partner pays tax on their share.
However, you should be aware that each partner in a partnership is personally liable for any losses and any debts of the partnership. There is no limited liability.
If the business risks are low then this can be an effective way to start off a business and ensure that partners are committed to the business. However, if the business fails it can mean real personal and financial difficulties for the individual partners involved.
There are some businesses required by law or the rules of a professional body or association to be in the form of a partnership.
A partner in a partnership does not have to be an actual person. For example, a limited company counts as a ‘legal person’ and can also be a partner.
When you set up a partnership you need to register for Self-Assessment with HM Revenue and Customs (HMRC) and choose a ‘nominated partner’ who will be responsible for managing the partnership’s tax returns and keeping business records. The other partners need to register separately and send their own tax returns as individuals.
+ What is a limited liability partnership?
A Limited Liability Partnership (LLP) is an alternative legal structure generally used for businesses that normally operate as a traditional partnership, such as solicitors, accountancy firms and dental practices.
An LLP has the same characteristics as a normal partnership structure in terms of tax liability, internal management and the distribution of profits, but it provides reduced financial liability, or ‘limited liability’, to each partner.
+ Which legal form is most tax effective?
Profits and income taken from the business are treated differently depending on whether you are a company, a partnership or a sole trader. The most tax effective business form will depend on how profitable your business is, and how you use those profits – will you be reinvesting profits back into the business or taking them for your personal use?
+ What name can /I use for my business?
Sole trader and Partnerships:
You can trade under your own name(s), or you can choose another name for your business. The name cannot include ‘limited’, ‘Ltd’, ‘limited liability partnership’, ‘LLP’, ‘public limited company’ or ‘plc’.
The name cannot be offensive, in breach of an existing trade mark, or suggest an accreditation, approval or endorsement by central or local government.
You can check if a trademark is already in use by using the Intellectual Property Office online search facility.
You do not need to register the business name, however if you want to protect the name and stop other people from using it then you should seek legal advice on registering the name as a trademark.
You must include all the partners’ names and the business name (if you have one) on official paperwork, for example invoices and letters.
You must choose a registered name for your business if you’re setting up a limited company. Your name must usually end in either ‘Limited’ or ‘Ltd’ (or the Welsh equivalents). You can also use a “trading as…” or business name, i.e., use a different name to your registered name, however it should not include ‘limited’, ‘Ltd’, ‘limited liability partnership, ‘LLP’, ‘public limited company’ or ‘plc’.
Your company name(s) cannot be offensive, the same as another company’s name or an existing trade mark or suggest an accreditation, approval or endorsement by central or local government. If you do register a name that is too similar to another company’s you may have to change it if someone makes a complaint.
You can check if a company name is already registered using the Companies House WebCheck service and you can check if a trademark is already in use by using the Intellectual Property Office online search facility.
If you want to protect your company name(s) and stop people from using it then you should seek legal advice on registering the name as a trademark.
You must include your company name(s) on all company documents, publicity and letters.
+ Do I need to register for tax?
Sole traders need to register for Self-Assessment with HMRC and file a tax return every year.
Partnerships need to register for Self-Assessment with HMRC and choose a ‘nominated partner’ who will be responsible for managing the partnership’s tax returns and keeping business records. The other partners need to register separately and send their own tax returns as individuals.
Most companies register for Corporation Tax and PAYE as an employer at the same time as registering the company with Companies House. Limited companies need to register for Corporation Tax within 3 months of carrying out business via the company.
You will need to register for PAYE as an employer with HMRC when you start employing staff. You must register even if you’re only employing yourself, for example as the only director of a limited company.
You must register for VAT if your taxable turnover is over £85,000 or you know that it will be. Your VAT taxable turnover is the total of everything sold that is not VAT exempt. You can also choose to register for VAT if, for example, you sell to other VAT-registered businesses and want to reclaim the VAT.
+ How do I set up a limited company?
Companies House is the organisation responsible for all limited company registration in the UK. Their website provides detailed information and guidance on setting up and operating a limited company.
You can set up and register a limited company by yourself. The whole process can be done online through the Companies House website, or by completing Form IN01 manually. Alternatively, you can use a third party, like your accountant, to process the application on your behalf.
The following documents must be completed and returned to Companies House in order to complete the registration process:
Memorandum of Association - confirms the intention of initial subscribers to form a limited company in the first place, with the following wording: “Each subscriber to this memorandum of association wishes to form a company under the Companies Act 2006 and agrees to become a member of the company and to take at least one share.” This is followed by a list of all subscribers. If you are registering online there is a checkbox to confirm that each subscriber has authenticated the memorandum of association. You do not have to submit a physical document.
Form 10 – director’s names, addresses and registered limited company address. To form a company, you must have at least one director. You can choose to appoint a company secretary, but it is no longer a requirement. You will also need to decide how you will apportion the shareholdings in your new company and if there will be different classes of shares.
Form 12 – states the limited company complies with terms and conditions of the Companies Act
Articles of Association – govern all aspects of how the company will be run, including directors’ powers, decision making by shareholders, voting rights, and how dividends are distributed. ‘Model articles’ are available which are perfectly adequate for the majority of businesses.
You must have a registered address where official mail can be sent. If you’re setting up a company in England or Wales, then the registered address must be within one of these countries. The same applies for Welsh, Scottish or Northern Ireland-based companies – the registered office address must be in the corresponding territory.
When registering your company, you will also have to select the relevant Standard Industry Classification (SIC) Code is a unique code to identify what a business does. You can check for the relevant code(s) on the Companies House website.
All companies must now keep a PSC Register recording all ‘People of Significant Control’ (people who own 25% or more of the shares in a limited company, or have 25% or more of the voting rights). If this information changes it can be updated via the Confirmation Statement which all companies are required to submit to Companies House each year, to keep the registrar up-to-date.
+ How do I safeguard valuable information?
As early as the ideas stage of setting up a business when you are discussing your ideas, you may want to consider how best to protect those ideas from being taken and exploited by others before you even get your business off the ground.
A non-disclosure agreement can be a valuable reassurance that any discussions and sharing of ideas with others can remain confidential while you build the business and business relationships. An NDA will protect your business by safeguarding any ideas and intellectual property rights.
Where there is valuable intellectual property involved, it may be important to make sure that such intellectual property is going to be owned by the company, rather than individuals. This may be especially relevant to ensure that investors are reassured about the ownership and stability of the IP portfolio. An Intellectual Property Assignment Agreement can ensure that the company has complete ownership of all IP assets in writing.