Starting Your Business

A sole trader runs his business alone, making all decisions and owning all the assets of the business personally. He is responsible for the debts and liabilities of the business but is able to retain all the profits for himself. There is no legal separation between the business and the personal affairs of the proprietor (ie. If the business becomes insolvent, the sole trader is liable for the debt). The sole trading structure is most suited to small businesses as there is very little formal documentation required. Since a sole trader is self-employed all profits will be taxed as income and each year the sole trader will need to make a self-assessment return to HMRC.

A partnership consists of two or more people who share the decision-making in respect of the business and ownership of the assets. Each partner is self-employed and takes a share of the profits. Subject to any agreement to the contrary, each partner shares the risks equally for the debts, costs and liabilities against the company. If one partner fails to meet his liabilities, any of the other partners may be held wholly responsible for all of the liabilities. As with a sole trader, if the business becomes insolvent, the partnership is liable for the debt.

When a partner performs an act within the scope of the firm’s business, that act will bind the other partners.

There are no specific registration requirements for a partnership and only minimal disclosure requirements. Although there is no legal requirement for partners to enter into a partnership agreement to regulate their relationship, this is strongly recommended. The Law Department can help you consider points relating to a number of issues including redundancy, bankruptcy, illness and death. We can also advise on the rights and responsibilities of partners and can provide legal support when partnerships are terminated.

The limited liability partnership is similar to the ordinary partnership. A number of individuals take a full role in the management of the partnership and share in the risks, responsibilities and profits of the business. The main difference between the two types of partnership is that with a limited liability partnership, a partner’s liability is limited to the amount of money he has contributed to the business (and additionally to any personal guarantees he may have given).

Like a partnership, a limited liability partnership is tax transparent (i.e. each partner is taxed on his share of the profits of the business). However, the LLP is treated as a separate legal entity and a third party (customers, suppliers etc.) will contract with the LLP itself and not with individual partners. The LLP therefore combines the benefit of a limited liability company with the organisational flexibility and taxation status of an ordinary partnership.

The formation and disclosure requirements are similar to those for a limited liability company. An LLP has therefore to be registered at Companies House and must file an annual return and annual accounts each year (both of which will, once registered, be publicly available).

There are two main types of limited liability company, namely the “limited” and the “public limited company” (“PLC”). Except for exceptional circumstances, both of these protect the managers and shareholders from liability to the company’s creditors. The liability for such company’s debts and obligations remains with the company itself and not the directors/shareholders. The only exposure for the shareholders is to contribute the amount, if any, remaining unpaid on their shares. A limited company is usually sufficient for most commercial investment purposes.

Establishment and operation of a PLC has greater legal requirements, particularly in relation to minimum capital. Its principal advantage over a limited company is the ability to issue shares to the public.

(a) Formation of a limited company

In most circumstances, a ready formed company is acquired “off the shelf” from a formation agent for a few hundred pounds. The company will have a standard set of statutes governing its operation (“Memorandum and Articles of Association”) which can be altered quickly at a later stage, which means that the company will be ready to conduct business with immediate effect.

 (b) Name

A purchaser of an “off the shelf” company may want to change the name of the company from the one provided. The Registrar of Companies keeps a central register (“Companies Register”) of names and provided the name chosen is not the same as a name already on the Companies Register, there are unlikely to be problems in changing the company’s name. In addition to the Companies Register, a search for the proposed name on the internet, in trade directories and in trade mark registries should be carried out to ensure that the proposed name is not the same or similar to someone else’s. If it is, this may lead to an action for passing off or trade mark infringement.

Every company incorporated in England and Wales is required to show on its letterheads, order forms and other correspondence, and on all of its websites its full name (including the fact that it is a limited company), its place of registration, its registered number and the address of its registered office.

(c) Share capital and shareholders

There is no minimum capital required for a private limited company and the majority of private limited companies have a share capital of £100 or less If shareholders wish to restrict the number of shares that can be issued, provisions may be included in the company’s Articles of Association. Fresh capital can easily be injected with a minimum of formality. There is a wide discretion as to the type and denomination of share capital, e.g. ordinary, preference, convertible, non-voting shares. Shareholders may be a single person or can be a number of individuals or other companies.

(d) Statutes

The governing statutes of a limited company are the Articles of Association. The Articles of Association contain the rules governing how the company is managed and will, for example, set out:

• Details of the share capital and rights attaching to shares
• Procedures for shareholders’ meetings
• Procedures for meetings of the board of directors
• How dividends are paid
• Restrictions on the authority of the directors

An “off the shelf” company will normally have standard form Articles (“Model Articles” laid down by companies’ legislation) and these can be amended according to commercial requirements

(e) Ongoing requirements

There are a number of ongoing requirements which a company will need to fulfil:-

• Registered office, where official documents can be notified to the company. Solicitors are able to do this subject to the requirement that the company does not actively trade from those premises.
• Preparation and filing of annual accounts.
• Preparation and filing of an “Annual Return” providing certain basic information about the company, its management and its share capital.
• An “Annual General Meeting” (“AGM”) of the shareholders, to be held in each year, primarily to consider the annual accounts

(f) Management

A company is managed and administered by its directors. There must always be at least one director, but there is no maximum number of directors of a company unless the Articles provide otherwise. PLCs must have at least two directors and must also have a “secretary”.

The secretary is the company’s main administrative officer and is responsible for organising minutes of meetings, keeping the statutory books of the company up to date, filing accounts and returns to the Registrar of Companies etc. As an officer of the company, the secretary often has authority to enter into contracts on behalf of the company. Private companies are not required to have a company secretary, although they may still choose to have one and in practice many companies continue to need someone to fulfil company secretarial functions.

There is no separate legal status given to a “manager”, as such. No particular qualification is required in order to be a director, nor does a director have to be a British citizen or UK resident. Unless the Articles provide otherwise, there is no requirement that a director holds shares in the company. Directors generally have sole authority to represent the company.

Alternatively the responsibilities of the secretarial function can be outsourced to your legal team. Please see our company secretarial services section for more information.

(g) Liabilities

The company has limited liability. This means, in effect, that in most circumstances neither the shareholders nor the directors can be held liable for its debts or other obligations, provided that the company has been properly administered in accordance with legal requirements. For a prudent businessman it is unlikely that any personal liability will arise.

The main area where personal liability might arise is in circumstances where the company has traded or continued to trade in circumstances where it is insolvent (i.e. it is unable to pay its debts as they become due) without reasonable prospect of being able to pay off creditors at a later stage. If the company should become insolvent, the directors must take steps to minimise the potential loss to creditors and, in normal circumstances, this will involve ceasing to trade. The liability (which can include the obligation to make good a

financial shortfall or making up financial losses resulting from fraudulent or wrongful trading) falls on directors rather than shareholders

Directors of a company also owe the company certain duties which are stated in company legislation and case law. These include the duty to work actively for the success of the company and promote it accordingly, exercise reasonable care, skill and diligence and not to allow their personal interests to conflict with those of the company.

A director may also be personally liable in circumstances where he entered into an agreement without due authority and he is in breach of obligations covering tax, health and safety and the environment.

 (h) Publicity

The file held by the Registrar of Companies must be made available for public inspection.

 (i) Tax

Tax will often be an important consideration when deciding which business vehicle to establish and advice on tax aspects of setting up and running a business should be obtained early. If the turnover of the business exceeds a specified threshold (currently £64,000), the business will need to be registered for VAT.

(j) Insurance

Some insurance is legally required including employer’s liability insurance, motor insurance and public liability insurance.

We can provide you with a number of cost-effective legal packages to assist you with the commencement of your business.