Setting up your business
You, and possibly a few other trusted individuals, have come up with a business concept. A business plan has been prepared and you are confident that this venture will be a success. On paper, the numbers all add up.
But how do you take your business from idea to reality? What do you need to think about now to avoid any difficult situations in the future?
You'll need to consider:
- whether to incorporate as a company or not
- the ownership structure
- the governing documents
- the business contracts
Whether to incorporate a company or not
What vehicle will you use to take the business forward? Will you:
- incorporate a company?;
- establish a partnership (limited liability partnership or non-incorporated partnership)?; or
- be a sole trader?
Each form has advantages and disadvantages for you to consider. The main advantages of a company is the limited liability for shareholders and the fact that a company has its own legal identity and is therefore able to enter into contracts.
You should consider what form is best for you, your business and its objectives; not just in the short term, but also for the future.
The ownership structure
If you have incorporated a company and aim to trade for profit, the owners will be shareholders and they will hold the issued share capital of the company as shares.
Partnerships will be owned collectively by the partners; and sole traders will personally hold the business.
For a company, you will need to consider how the shares are held (for optimum personal tax efficiency) and the appropriate rights attached to the shares of the investors (for example, it may be necessary for some shares to not hold rights to vote but a preference on dividends declared).
The share rights will be governed by the Articles of Association and may be subject to a Shareholders’ Agreement.
The governing documents
A company will adopt Articles of Association - a public document which is filed at Companies House. The Articles of Association govern the way that the directors and shareholders will act and the general running of the company (e.g. holding board meetings, share transfers and the powers of directors).
Shareholders will typically enter into a further document referred to as the Shareholders’ Agreement which is a contractual document that is not publicly available. This will contain further provisions in relation to the shares and aims to protect shareholders, particularly in majority:minority shareholding situations. Shareholders’ Agreements, if correctly drafted, can be vital in avoiding future issues between shareholders as the company grows, or as a shareholder’s personal situation changes (e.g. restrictive covenants stipulating restrictions on activities when a shareholder leaves the company).
A partnership should have a Partnership Agreement that governs the relationship between the partners.
The business contracts
You have an established business, possibly even a company, and you are ready to start business operations. One key matter is outstanding; you need contracts.
As good as your relationships are with potential suppliers, customers and employees, you should get everything in writing. This will protect you in the future if there is any ambiguity or disputes. Litigation can be very costly and therefore avoiding potential issues is vital.
You will need to put in place:
- employment contracts and service agreements
- consultancy agreements (if relevant)
- terms and conditions of sale (for your customers to sign up to)
- Intellectual Property protections and licences (if relevant)
- property contracts (are you to occupy your business premises under a licence or lease?).
You may consider bank funding (perhaps invoice discounting) and these arrangements will need to be negotiated and well documented.
If you take these pro-active steps at the outset of your business, you should avoid reactive costs in the future, be they costs incurred by the correction of outstanding documentation, a dispute with a customer or even a deadlock situation between shareholders.
Read on - The beginning: The governing documents