Structuring your Business
One of the first decisions that must be taken, after the initial
momentous one to establish your own business, is the legal structure
you will adopt. The form that is chosen will have important implications
for the liabilities that may arise in the course of business and
also for the tax treatment of profits. The choices to be made will
vary depending on whether or not you are going into business on
your own or with others.
If you are going into business alone, you can simply start trading
as a sole trader. All profits that you make will
be treated as your personal income and all losses can be set against
profits to reduce your tax bill. Be aware however that liabilities
arising from your business, including bank loans, trading losses
and liabilities under contracts that turn sour, will count against
your assets, including your family home up to their full value and
beyond, leaving you facing personal bankruptcy if things go wrong.
If you are concerned about such personal liabilities, you can take
the step of establishing a limited company and
run your business through that. If only you and your family are
the only shareholders, this step will not help your tax position,
but if things do go wrong, your personal wealth will not be at stake
unless you have given personal guarantees of the company’s
liabilities.
If you are joining with others to found a business the choices
are greater. You can choose to form a partnership
with your colleagues. Unless agreed otherwise, losses and profits
will be shared equally by the partners. However none of you will
have any protection in respect of the amount of liabilities that
may arise. In addition the partners will be jointly and severally
liable for these liabilities. If one or more partners have insufficient
assets to meet their share of the liabilities the remaining partners
must make up the shortfall. It is possible, where a partner is contributing
only money, and is not participating in the business, to form a
limited partnership. The “limited partner”
then stands to lose only the amount of money he has invested and
no more. Of greater practical use may be the recently introduced
limited liability partnership where the liability
of each partner can be restricted to a nominal amount, thereby protecting
personal assets.
The choice of a limited company structure remains open and is particularly
suitable for businesses that are expected to remain operational
for many years and ultimately grow to employ other people. The founders
of the business who take an active role can be appointed as directors,
while those who just wish to invest capital or other assets can
content themselves with shares. The limited company can in the fullness
of time be sold to realise the investment of the parties or floated
on the stock market as a public limited company.
Domestic Business
Having decided on the shape that your business is going to take,
it is now time to look at administrative matters such as VAT registration,
where you expect your turnover to exceed the current threshold;
ensuring you have appropriate financial advice; obtaining any insurance
that is either advisable or required by law and start trying to
make some money.
Just about every business transaction you enter into will constitute
a legal contract, whether or not it is covered by a written document.
You should ensure that in each case the scope of what you are going
to supply, be it goods or services, is adequately defined and that
the amount you are going to receive in payment and the time when
you are going to receive it is also clear. If you do not limit the
liability you are prepared to accept under the contract, your liability
for breaching your contractual obligations is potentially unlimited.
If you are negligent in what you do and cause loss or damage to
your client or supplier or even a third party, once again you may
face unlimited liability. This can have serious personal implications
where you have not limited your own liability through adopting a
limited company or limited liability partnership
structure. You can of course protect yourself through a business
insurance cover such as Public & Products Liability.
You will have to ensure that your business activities do not infringe
any of the thousands of laws and regulations imposed by Parliament
and by the EU in relation to (amongst many, many other things) Employment,
Health & Safety, Environment, vehicles and machinery.
Finally of course you will have to give sufficient time and attention
to your business to make sure you actually make some money. Will
you need a sophisticated IT system? Will you be doing business online?
Will you want to secure a quality accreditation such as ISO 9001?
What about finding those precious customers? Is your marketing adequate,
and when you have found potential customers how will you turn them
into satisfied clients who will come back to you again and again
in the future?
International Business
The legal implications of trading internationally were once mainly
relevant to major companies, but Globalisation and the IT revolution
has made this field of law of concern to SMEs and even to individual
traders. All the considerations applying to business within the
UK still hold, but a further level of issues must be addressed.
Fundamental is the question of whose national law is to apply to
a contract. This will often be agreed in the contract itself. While
the UK trader may be wary of foreign laws, a potential customer
may insist on their acceptance. Most legal codes are at least superficially
fair to both parties, and it is often more important to seek a neutral
forum for dispute resolution, such as arbitration by the International
Chamber of Commerce (“ICC”) in a third country.
Whether trading in goods or services, protection of intellectual
property rights is vital. Where patents or trade/service marks exist
in the UK, further registrations may be desirable in target markets.
At the very least, the © symbol should be used on all proprietary
information to secure protection under the Universal Copyright Convention.
Another key issue is security of payment or delivery. The most
common form of security is the Letter of Credit, whereby a bank
holds the buyer’s funds and releases them to the seller only
when delivery requirements are met. For goods, delivery is often
defined by reference to INCOTERMS, (ICC definitions of what is meant
by FOB, CiF, C&F, ex-works etc.) Where services form all or
part of a supply, it is vital to ensure that proof of completion,
acceptable to a bank, is provided (preferably by a trustworthy third
party). Currency risks must also be addressed, particularly in long-term
contracts.
Much more common than in domestic trade is the requirement for
the seller to provide a guarantee or bond that the buyer may call
in the event of the seller’s default. Great care must be taken
with the wording of such documents to avoid their being unfairly
called; insurance is available to cover such an event.
As a business grows, it may wish to appoint an agent, licensee
or distributor or form a joint venture. Here EU law may be relevant
even where the other party is outside the EU. Tax considerations
are also particularly important.
If all of this seems daunting don’t panic! No one can be an
expert in everything: the art of successful business depends to
a great extent on getting the right support and assistance at the
right time. ibd exists to help you get the right
answers at the right price together with as much affordable hands-on
help as you need.
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