STARTING A CONSTRUCTION BUSINESS
According to the Department for Business Innovation and Skills, the UK construction sector contributes a whopping £90 billion to the economy, making up 6.7% of our total GDP. It’s one of the fastest growing industries, accounting for 10% of the total employment, with 280,000 businesses creating nearly 3 million jobs nationwide. But that’s enough of government stats for now. At the end of 2016, we did our own research, commissioning a YouGov survey and hiring the brains of the Centre for Economics and Business Research (Cebr) to analyse it. We found that the Construction Sector, which includes contractors, service providers and suppliers of goods and materials, is losing over £1.4 billion annually through not taking care of their legals, with each business encountering around 8 legal issues annually, at a cost of £13,160 (see full report here). This comes as no surprise for a contract-heavy, dispute-prone industry that has necessarily tough health and safety regulations surrounding it. But! There is hope. Having all your legal ducks in a row, your contracts crystal clear and watertight, knowing your rights during a dispute and how to avoid them and understanding what laws apply to you (and putting safeguards in place to make sure you don’t fall foul!) are surefire ways to not becoming another stat – LawBite, government or otherwise… Whether you’re wanting to go solo with your skill, start a residential construction company with your dad or even growing a big commercial enterprise, every business could use a helping hand. With this in mind, welcome to Part 1 of our 3-part ‘LawBite Legal Construction Guide’ series. Keep these useful guides handy and if you’re not sure whether something applies to you or you need legal advice from one of our expert Construction lawyers just ask!
Preparing for take-off
Develop a business plan
Having a solid business plan is the first necessity – and not just if you require funding, as many people believe. It is great to have a plan of action from which to understand where that business should be going and to have ballpark figures showing the likely cost to get there. In reality you’re likely to stray from it, due to the nature of running a business in practise. However, cash is king and launching a new enterprise can be an expensive endeavour, particularly in its early stages. Your business plan will allow you to visualise how much you’re likely to be spending, leaving room for error, against how much you’re going to have to make to cover that expense and hopefully turn a profit. From this you will also be able to articulate your motives and objectives and instigate a marketing strategy. It is better to think about potential problems early than come across them when you have already doled out the cash; we all know the saying ‘fail to prepare, prepare to fail.’ If you’re stuck on where to begin with this, there are plenty of template business plans online you could start with. Visit our partners Startup Direct who are experts on business planning and offer some excellent free templates for starting out.
Another thing you should be doing at this stage would be deciding whether to set up as a sole trader, limited company (Ltd) or as a limited liability partnership (LLP).
Setting up as a sole trader is certainly the quicker and easier option as there are far less complicated accounts to file. However, the major drawback is that you are personally liable for any losses accrued by the business. This means that creditors can go after your personal assets and your credit rating will almost definitely be affected, hindering your ability to borrow money.
Given the capital intensive nature of the Construction industry and the technical and financial risks associated with it, many construction companies take the form of a limited company and as such register or ‘incorporate’ with Companies House (which you can do so here), giving it its own company registration number and registered office address. As the company is registered at Companies House, certain business information must be filed with them and made publically available such as names of shareholders, directors and the company’s annual accounts.
The point is: setting up your company as a Ltd brings some interesting benefits such as:
- Limiting your liability so your company is a distinct legal entity from yourself. Usually the only liability you have is the amount you invest in the company through buying its shares. So, as the name suggests, you receive legal protection from your company’s finances. If things were to go wrong, the creditors could not come after your own personal assets e.g. your house or that expensive painting handed down by uncle Geoffrey.
- It is easier to expand your business if you want to grow. This is because some agencies won’t work with sole traders so having the ‘company’ status is valuable.
- It is easier to raise finance if you’re trading as a company rather than an individual, again if you are looking to expand and need the extra cash.
However, these benefits come with some burdens. We could say it is the price you have to pay to enjoy the advantages of trading as a Ltd. A limited company is more intensively regulated than the other company structures available. It has a more complicated status and you will have obligations coming from the compliance with the Companies Act 2006 .
It is advisable at this stage (if there is more than one person who is invested in the company as a shareholder) to have a shareholders’ agreement in place. This will govern how the company is run and who is meant to do what, preventing costly disputes later down the line. It will also dictate what to do in the case of a deadlock between shareholders. Prior to or in the course of implementing the agreement, you may also wish to consider amending the Articles of Association that ensure the terms of the shareholders’ agreement are reflected in the way directors run the company. This is a particular consideration when shareholders also act as directors.
Like a limited company, a limited liability partnership (LLP) is a separate legal entity in its own right. However, members of an LLP are taxed as self-employed individuals so the tax treatment of an LLP can be more beneficial than that of a limited company depending on the circumstances. It does, however, mean that a Partnership Agreement needs to be formed with another party and it will need a designated member who is responsible for making all the filings at Companies House. It is a legal agreement that governs how this arrangement is run, which members of the partnership must stick to. You must also make sure to comply with the Limited Liability Partnerships Act 2000 as well.
Guarding your ideas
At this point in time, you’re probably excitedly talking about your endeavour with anyone who will listen, which is great as it’s a fantastic way to soundboard ideas and sense-check your vision. But perhaps you want to keep your business or aspects about its arrangement confidential. The best way to do this is normally getting people to sign a confidentiality agreement or ‘non-disclosure agreement’ (NDA) before you start talking. Bear in mind they’re not only relevant at this stage but can be used whenever you want to secure some protection for your idea or intentions as you grow. For example, much later down the line you might want to expand your company into new areas and need to recruit people and/or agencies to achieve this but do not want them to pass this information on.
Building any kind of construction business is an endeavour that usually requires some seed capital (the initial money needed to start a business). Here are a few traditional and not-so traditional (‘alternative finance’) routes you could take (aside from using your own cash) to fund that initial investment and a few legal considerations to take into account for each:
- Friends & family: Often the first port of call after your own investment. A good source, though conflict can arise when you bring money into any relationship. Make sure you have a loan agreement in place if you are borrowing the money. You may even want to give away equity (shares) instead, bringing them more deeply into the business as a shareholder. In this case, a shareholder agreement is good document to put in place.
- Banks: It is increasingly difficult to get a bank loan for a small business, though it is not impossible. You will have to provide the bank with very realistic cash flow forecasts, whilst proving that you will be able to pay back the loan with interest. Often – and here’s the important part – banks will want added security for their investment, which often means they’ll want to secure it against your possessions e.g. your car or house. Think carefully about how much you are willing to risk here. They will give you a contract for the loan which you should ensure you understand fully. One point to make here would be on the subject of your Credit Rating, which a bank will use to determine whether or not they’d like to lend to you. Services like Experian’s My Business Profile offer access to all your business report and score details along with the help and support you need to understand the information and investigate or correct anything that doesn’t look quite right. Have confidence when applying for a business loan or credit with suppliers, check your business credit score for FREE with Experian.
- Be smarter about how others see your business. Check your Experian business credit score. See how lenders, suppliers and customers see you.
- Improve your business credit score. See what’s affecting your score. Take steps to improve it, and make sure it’s as good as it can be – always.
- Create new opportunities to grow your business. Access preferential credit terms. Unlock new sources of finance. Grow your business.
- Government loans: There are currently a few government initiatives who will lend to start-up businesses. One of the largest (that we work with) is Start Up Loans, which has been developed specifically for start-up businesses who have been trading less than 2 years. You can borrow up to £25,000, with an interest rate which is currently set at 6% (June ‘17). As this is technically a personal loan, you will be personally responsible for repaying that loan. It means your personal assets – house, car, money in the bank – may be used to cover the debt, so it is important that you are aware of the repercussions if you cannot pay the loan.
- Private investors e.g. ‘Angels’ or Private Equity firms: With this option, you will probably be giving shares in your company in return for investment or it might be a loan. They will bring tough investor/funding agreements to the table. These agreements will set out what they expect you to do and not to do and to what extent the investors what to take part in the strategy and the management of the company. Make sure you know what exactly you’re giving up and what to expect from your relationship with them.
Some key points you must consider and understand would be:
- What is being paid, when is it being paid, and how it is being paid? E.g. is the money being paid all at once or in tranches?
- What is the payment in return for? I.e. what is the structure of the deal. This could be in return for shares or through a secured or unsecured loan. A ‘secured’ loan means it is secured against the company’s assets which gives more protection to the investor.
- If you are giving away shares, you will need to work out the valuation of the company. Once agreement on valuation is achieved between you and the investor, it’s possible to work out what 100% of the shares in the company are currently worth and then to work out what the investor’s contribution is worth. Remember, if you give away more than 25% of your company (i.e. your shares are worth less than 75%), you are giving away a substantial amount of control since you cannot pass a ‘Special Resolution’ e.g. to change the company’s name
- Next, you must decide what type of shares you are giving away, which is where it gets a little more complicated. The shares may be “ordinary” shares – but companies can have more than one class of ordinary shares. They may have “A” shares or “B” shares with different rights (e.g. the “A” shares carry voting rights but the “B” shares don’t). Some investors like to get “preference shares”, which carry a guaranteed return or “dividend” each year out of profits and usually are given preference in a situation if something is to go wrong. Some investors like to have “convertible” preference shares which they can convert into ordinary shares after a certain date so as to protect their position if the company starts doing well.
- Keep in mind the future too. What happens to everyone’s shares if you want to give away more? There are here the issues of preferential rights and how to deal with potential dilution to be discussed and agreed upon.
- Finally, what kind of operational control are you giving up in return for the investment? Sometimes the type of share you give away will mean you will have to consult the investor on key business decisions such as the desire to raise further funding or changing the nature of the business.
Remember, any big investor worth their salt will carry out a thorough due diligence investigation so you must make sure to have all your legals under control with the correct paperwork and that your accounts are in line. Believe it or not, lack of legal formality in the way you run your business may substantially reduce your chances of getting funding and increase the cost of the money you manage to get.
Side-note: Something which will make your company more desirable to invest in is if you can provide them with tax breaks by signing up to the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS). These schemes have been set up by the government to encourage investment in start-ups and SMEs. You can find out more information about registering your company for the scheme on the government’s website.
- Crowdfunding: This is a popular way to raise for start-ups via public mandate and is essentially lots of people putting in relatively small amounts of money. There are 2 main types for you to consider and to understand the implications of each:
- Equity-based, for example Crowdcube (LawBite has raised twice on this platform) or Seedrs. Investors will receive a stake in the company via shares in the hopes you will grow and they will benefit. In this case, investors usually sign up to the company’s Articles and will receive a simple shareholding.
- Rewards-based, for example Kickstarter or Crowdfunder. In this case, investors will receive a tangible item or service in return for their money.
- Peer-to-peer lending or ‘crowdlending’: This is for more established businesses who already have a proven track-record as a consideration for future growth. Often an unsecured personal loan, money is loaned via an online platform such as Funding Circle in return for interest. The interest rate is set by the lender or it is established by the intermediary company based on the company’s credit analysis.
- Pension-led funding: If you have a pension pot, recent legislative changes to pension rules means that you can now use it to fund your business. In return, you can receive tax-free payments from your business to boost your pension.
As you can see there are many ways for you to access finance to launch your products or services and this list is not exhaustive. We’d recommend you visit Alternative Business Funding where you can compare many alternative finance options and select the one that is most suited to your needs. For almost all of these scenarios, you will be engaging others in a contractual agreement and you need to fully understand the terms and implications of these arrangements or you could be putting yourself at risk.
Contracts contracts contracts
The construction sector is heavily contractual. And it should be! Many parties are involved: employers (those who “buy” the construction works), the contractors (those in charge of the works), the sub-contractors (those to whom certain parts of the works will be delegated), the professional consultants (the experts), the suppliers (where materials and equipment come from). And independently of the type of building to be delivered in the end, a wide range of areas are covered: design, engineering, management, building, warranties and guarantees – just to mention the more generic ones.
Setting out where you are and what you have to do in this complex chain is absolutely essential so there can be no confusion throughout the process and there are clear routes to resolving any potential conflict.
What is usually called a “construction contract” is the contract between the employer and the contractors. It is where they define what has to be built and how. There is a wide range of legal structures and standard forms available to construction businesses. Choosing the most appropriate to the size and characteristics of your project and managing it efficiently is key to the success of the project. Each structure allocates activities, remuneration and risks in a construction contract differently so it is key that you understand very well what you are signing up to.The most important aspects of a construction contract – and from where most of disputes arise are:
- The definition of the scope, i.e. what exactly has to be done, and what happens if the changes are required or desired along the way;
- When the works have to be concluded and what happens if they are concluded on time;
- When payments are due and what happens if they are not paid on time;
- Technical specifications and quality and performance requirements and what happens if the agreed standards are not met;
Make sure you pay close attention to these issues in the contract itself and in the many schedules that constructions contracts usually have to deal with all the technical stuff required to build or renovate a building or part of it.
The construction contract often walks side by side with agreements with the professional consultants, subcontractors and suppliers. It may seem hard work – and it is. Don’t underestimate this task! It is worth making sure all these agreements are compatible, work well together and don’t contradict each other, legally nor commercially or technically. It will save a lot of time and money on disputes in the future.
Depending on the size of the project, warranties for performance and completion of the works are very likely to be required as well. The bigger the project, the more relevant they become – and more items will be added to the list of contracts ruling the construction project.
If you want to build for a public authority you have to observe the procurement rules set out in the invitations to tender or any similar document. Private employers can set out their own procurement requirements as well. If that’s the case, you have to comply with what is being requested. Otherwise, you will hardly be awarded the works.
And don’t forget that signing the contracts is the beginning of the construction adventure! Construction businesses depend a lot on good contract management to perform well. You have to monitor what is happening to all these contracts and make sure everybody is complying with what has been agreed – and if not, you have to give the appropriate notification of that. A lot of disputes in the construction sector relates to issue in contract management, in particular failure to register properly that there was a problem and how it should be handled (see part 3 of the practice guide to understand more about disputes and how to deal with the situations where you don’t have a signed contract in place).
You probably have an idea of what you want your construction business to do and how you would like to operate. Whether you’re working as a sole trader plastering or a larger company bidding for a public tender to help build a bridge, you’ll want a recognisable identity. You may need to come up with a company name, logo and perhaps designs for a website, as well as any marketing ‘collateral’ you might have. This is a three-step process: 1) Coming up with the ideas 2) Executing and 3) Protecting them. This is what’s known as your ‘IP’ (intellectual property) and although it’s not usually the first legal issue that comes to mind it IS extremely valuable if you want to develop a brand and is therefore worth safeguarding before someone uses it.
Naming your company
There are many different approaches here, and whilst this isn’t ‘a guide to branding and marketing’ we can certainly help you out with how to do it legally so you don’t run into any problems later down the line. On many occasions, there have been businesses who have begun trading only to receive a letter of complaint from a company which is already trading under that name (or something very similar) claiming that they are confusing the market and they must cease using it (and sometimes even reimburse for damages with an IP infringement claim). Therefore, before you reach a final decision about your company’s name, it’s pretty integral to make sure that:
- It’s not already registered with Companies House and it’s actually allowed to be used in the marketplace. You can check this using their Company WebCheck.
- It hasn’t been registered already as a trademark. You can check here using the Intellectual Property Office (IPO) ‘Search for a Trademark’ page.
- The website address/domain name is available if you want one. (Okay this is not specifically a ‘legal’ consideration and you can actually buy these off the domain’s owner, but that can be costly and you might not want the hassle). Easily check here using 123-reg.
Do keep in mind, however, that you cannot trade mark certain things, so you might not be able to protect your brand entirely. Have a look at these brief guidelines on the government’s IP website before deciding on a name.
Logos and other designs
Another part of the ‘branding exercise’ you might want to consider is creating the look and feel of your business. Unless you have fantastic design and branding skills (and the time to utilise them), you might want to hire a freelance graphic designer or an agency to create a logo and any other marketing collateral e.g. a slogan for you. If you do hire a designer or an agency, make sure you have a contract in place that specifically, precisely indicates who owns the intellectual property in whatever they create, who can use it and where and how, as well as stating a deadline for the project and the costs involved. A ‘Supply of Services’ style contract would be a good place to start.
Once you have these lovely creations in your grasp, you really should think about protecting them and this means registering a trademark. Having a trademark allows you to:
- Take appropriate legal action against people using your brand without prior consent
- Sell and license your brand
- Use the famous ® symbol next to images of your brand which will act as a deterrent for those wishing to use it without your knowledge
It costs £170 to register a trademark in one class (online, £200 on paper), which refers to the type of product or service the trademark refers to. Each additional class you need costs £50. These are the ‘official’ government fees though you might be interested in seeking professional help as the forms are quite complicated to fill out.
Again, bear in mind some images and phrases will not be able to be trademarked (an important step outlined below) so check the government’s IP website before making any final decisions.
We hope you’ve enjoyed our brief guide to setting up your construction business, keeping the organisation’s legal needs in mind. We would recommend you seek professional advice if you’re confused about any of the above – don’t get bitten! LawBite and its experienced lawyers (LawBriefs) can assist with your organisation’s legal queries and documents in a clear, plain-English, objective, friendly manner for around half the price of a standard law firm. If you’re unsure of what you need, contact us for a free 15-minute consultation with one of our Construction experts too!!
Carla Caroli, Corporate and Construction LawBrief (LawBite lawyer)