Theresa Grech – (Author) Partner and Head of Corporate – Ince
Karina James-Wiltshire – (C0- Author) Corporate Legal Executive – Ince
During Covid-19, we have seen many old and new businesses struggle, some to the point of collapse, but there have also been some great commercial success stories in recent months. There are many factors that could sway individuals to stay clear from venturing into starting-up a business – with the main one being cost.
It is understandable that costs are currently tight, but asking for advice from lawyers, accountants or tax advisers from the outset can help new business owners navigate some of the potential pitfalls. For example, advisers will be able to ensure that the new business:
- Has a robust structure to reduce any exposure to personal liability;
- Is set up in a tax efficient manner;
- Enters into contracts with third parties on favourable terms; and
- Protects its intellectual property rights on both creation and disclosure.
If you are thinking of or have recently started a new business, our “start- up” series will provide you with some legal knowledge to help you move your new business in the right direction.
Setting up your business
There are several different ownership structures to choose from when setting up a business in the UK. The adopted business structure is important as it will determine the legal liabilities a business may incur whilst in operation.
The main types of business structures are:
- Sole traders;
- Private Limited companies, and;
- Limited Liability Partnerships (LLPs).
It is worth noting that another business structure is a ‘public limited company’ (PLC). From incorporation, this company would have at least £50,000 in total nominal value of all shares in issue, with £12,500 of these shares having already been paid for by the shareholders. PLCs are more regulated than private limited companies and do not tend to be used for start-up businesses.
What are the advantages of incorporating a business?
If you are currently operating as a sole trader, you are running the business as an individual – and therefore the business will not have a separate identity from your own. This means that you will be responsible for the liabilities of the business and will be personally liable for any loss it makes. Similarly, if you have a partnership, you and your partners will be personally responsible for the business. Unlike a limited company, a partnership is not a separate legal entity. As a result, not only will the profits of the business be shared amongst you and the partners, but you will also be responsible for a share of any losses the business makes and also for the debts incurred on behalf of the business.
A Limited Company (Company) is the most common structure incorporated in the UK and is unique in the sense that it has a separate legal entity. This essentially means that it can buy, hold and sell property in the same way as an individual can. A Company will therefore have its own benefits and liabilities. Any profit (subject to tax) made in the business will be owned by the Company. Then, the Company can distribute its profits to the shareholders by way of dividend and when the Company is wound up, it will be divided amongst the shareholders in proportion to their shareholdings.
Most Companies are limited by shares, which means that the shareholders will only be liable for the Company’s debts up to the value of the shares which they own, but for which they have not yet paid. As the shares are usually paid for when the Company is set up, this means that the shareholders will not have any liability for the debts of the Company in normal circumstances. Also, the directors will not be responsible for the debts of the business unless they have breached their directors’ duties (for more information about directors’ duties in the UK, read our guide here) or broken the law such as fraudulent or wrongful trading.
Who owns and manages a Limited Company?
A Company will have either ‘shareholders’ (if it is a Company limited by shares) or ‘members’ (if it is a Company limited by guarantee) and these individuals (or corporates) own the Company. The ‘directors’ are the people responsible for running the Company. Sometimes the shareholders are also directors, but this is not a requirement. The law imposes duties on the directors in running the Company and directors also have other additional responsibilities.
The Articles of Association are the main constitutional document of a Company. These regulate the Company’s internal affairs and contain provisions dealing with matters such as directors’ powers, proceedings of meetings, and conduct at board meetings and so on. Sometimes shareholders will enter into a separate shareholders’ agreement. We will provide more information on shareholders’ agreements in part two of our series.
What is the difference between a Limited Company and a Limited Liability Partnership (LLP)?
The rules that govern an LLP and how members carry out its business will usually be set out in an ‘LLP agreement’. An LLP agreement is not a legal requirement, however it is advisable to have one. Unlike a Company, an LLP does not have directors and shareholders but has members and designated members (who have extra responsibilities in the LLP agreement). Similarly to a Company, an LLP is also capable of holding and owning its own assets and will be liable for its own debts. Also, the members of an LLP are not personally liable for the debts of the business. If the LLP cannot pay the debt, the liability of the members is limited to the amount which the members have invested into the LLP.
It is important to have the right structure from the outset, as it is not possible to re-register an LLP to a Company and vice-versa. Instead the procedure requires the assets and liabilities of the existing entity to be transferred to the new entity. Once all the assets and liabilities are transferred to the new entity, the existing entity can then be struck-off the Register of Companies. This process is costly and time consuming and it is strongly recommended to seek advice from a tax advisor and a legal advisor before setting up your business.
Are you starting a new business?
To help new businesses in these uncertain times, we have prepared a free start-up pack. The pack contains useful guidance highlighting the key actions to undertake and issues to consider so that your new business has the correct legal framework and protection from the outset – and ensuring your start-up business has every chance of success.
To download our free legal start-up pack, please complete your details here.
Want more information and advice?
For more information and advice on legal considerations for start-ups from our corporate legal team or guidance on setting up a company through our company secretarial service, get in touch with a member of our team below:
Theresa Grech, Partner and Head of Corporate, at [email protected]; or
Karina James-Wiltshire, Corporate Legal Executive, at [email protected].
Melanie Kincaid, Head of Corporate Support Services, at [email protected].
The information above is not and should not be taken to be legal advice. You should not take action or omit to take action based on this information.