As part of our commitment to helping our network of SME and startups, we’ll be providing you with a 3 part series of blog articles which will help you navigate and plan your SME journey from start to finish. Or as we like to say at LawBite from ‘Idea to Ideal’.
Enjoy the ride!!
Business Structure – Sole Trader, Partner or Limited Co.
We assume that if you’ve arrived here you already have some type of business entity formed, no matter how small at present. But just to summarise…there are 3 main types of trading structure; sole trader, partnership and limited company.
Each of these structures come with their own distinctive list of advantages and disadvantages and which one you choose very much depends on what your business idea is and the type of business person you are.
Use the information in this blog post as a handy introduction but not as a replacement for more in-depth investigation or professional business legal advice.
Sole traders, of course, enjoy the benefits of control, flexibility and earning potential while a partnership means a wider source of ideas and resources but with risks if that relationship starts to break down. The safest of the 3, because of the clear distinction between the ‘company’ and the ‘individual’, is the setting up of a limited company.
Related legal formalities
Each of these structures also have its own set of legal formalities that must be taken care of. The simplest are those of sole traders, where you’ll need to consider registration with the HMRC as self-employed, licensing and VAT. A partnership, as you’d expect, requires as a minimum a Partnership Agreement, which covers the particular basis of the partnership. To form a limited company you’ll need to familiarise yourself with The Companies Act. This is where you will learn the numerous responsibilities you will have to adhere to when running a limited company.
The Companies Act requirements cover the following – business name, directors and their duties, statutory registers, records of resolutions and shareholder meetings, annual account audits, taxation, special resolutions, employee tax and National Insurance.
If you can’t get to grips with all of this with total confidence you really will need professional legal advice from a lawyer or an accountant.
In addition, you will need to be aware of The Small Business, Enterprise and Employment Act, 2015 and the requirements of Articles of Agreement and Shareholder Agreements which are equally important areas of company law.
Choosing Your Funding Partner
All business need money to grow their operation as you will absolutely not be surprised to know.
This is your business’ initial financing. It is not normally over the value of £500,000 and at this stage you’ll need a detailed business plan which covers your business narrative along with a set of figures.
As a business moves from the start-up phase through to becoming more mature, funding can be sort from private equity investors or venture capitalists. They will require a higher level of detail on your business’ performance and achieved revenues.
Sorting through the funding source options
At the very beginning funding can come from family and friends as well as government bodies. Other sources include award grants (which are normally not repayable) and angel investors who are individuals who invest in start-ups and may take an active role in the business.
It’s helpful to remember that there is tax relief available to those who invest in startups, this should be borne in mind by business owners when negotiating with these investors. Enterprise Investment Schemes (ES) and Seed Enterprise Investment Schemes (SEIS) are the most well-known investment tax relief schemes.
Our partner Alternative Business Funding (ABF) offers a range of funding source options through their funder finder platform that are ideal for SMEs and start-ups.
Closing the Funding Agreement
The main things to consider when closing funding deals are – confidentiality agreements, raising funds legally and the investor agreement form. These things are essential to protecting you as a business owner and professional legal advice is desirable at this point.
As part of confidentiality where you have to be open and frank to your potential investors you should ask them to sign a non-disclosure agreement (NDA). It is the Financial Services and Markets Act (2000) which governs financial services and states that only a person who is authorised by the Financial Conduct Authority (FCA) can invite another party to invest in a business. Investment agreements cover how much is being invested and on what terms. This is where expert business legal advice is essential in making sure the agreement is exactly as you require – it really is that important. Especially if this will involve the issuing of shares.
Whichever form of financial funding you decide to go for the following form an important part of finalising the agreement.
Funding in return for shares
Companies House notifications
Stock transfer forms
Registering share changes
Supplying share certificates
In the next part of this 3 part series designed for our SME client network we will look at the legal mechanics of running your business in those early to mid stages and point out some of the common pitfalls of which you should be aware!
For expert business legal advice and a free 15 consultation, please do enter an enquiry or call us today on 020 7148 1066 to speak to a member of our friendly Client Care Team.
This article is written by Michael Jaiyeola from LawBite. This article has been adapted from ‘Law For Small Business for Dummies’, by Clive Rich, LawBite Founder, A Wiley Brand