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IN136 - Starting up a Business in the UK

You have decided you want to start up your own business. There are two ways of doing this - to think of a new idea and start the business from scratch or to buy an existing business. This article focuses on the first method, but many of the issues will also apply to the acquisition of an existing business.

After you have thought of the business idea you then need to decide how to put that idea into practice. There are a number of ways of running a business, as a:

1. Sole Trader
2. Partnership
3. Limited Company
4. Limited Liability Partnership

There are different legal implications for each of the alternatives. This article is written on the basis that a limited company is formed, although partnerships and sole traders are also mentioned. A number of the issues illustrated in this article will apply to whichever alternative is chosen.

LIMITED COMPANY

Setting up and running a limited company

A company needs to be incorporated. To do this you will need to decide on a name for the company. Please note that there are limitations on the names which can be chosen. For example you cannot register a name that is the same as another limited company and some words and phrases require prior authorisation, such as ‘royal’ ‘British’ and ‘charity’. The Registrar of Companies at Companies House has guidance on choosing a company name. This can be found on the Companies House website (www.companieshouse.gov.uk).

You will need the following information to incorporate a company.
As an alternative to incorporation, companies can be purchased “off the shelf” from formation agents. On the purchase of a ready-made company the directors and shareholders of the company will need to change and the Memorandum of Association and Articles of Association will need to be reviewed to see if they need to be amended.

On incorporation the company will then be given a company number. This is an important number as the company name may change but the company number will remain the same. The company will also be issued with a certificate of incorporation. This is an important document which the company will need, for example, to set up a bank account.

Once the company has been incorporated a first board (directors’) meeting will need to be held and thereafter board meetings and shareholder meetings will need to be held. The first board meeting will cover the following matters:

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The directors need to disclose any interests they have in shares/debentures in the company. This is commonly done at the first board meeting.

Shareholder approval will be necessary if service agreements for longer than 5 years are to be entered into with the directors. This can be done by way of a written resolution.

The shareholders can pass an elective resolution to dispense with the need for annual general meetings and the laying of accounts and reports before a general meeting.

Various statutory filings need to be complied with and the company should create and maintain statutory books. The statutory books of the company comprise the register of members, register of directors, register of secretaries, register of directors’ interests, register of charges, minutes of board meetings and shareholder meetings, accounting records and directors’ service contracts. The primary role of the company secretary is to comply with these requirements. These statutory registers are generally kept at the company’s registered office.

Dixcart can incorporate a company and provide ongoing company secretarial assistance.

When a business is run in the form of a limited company the company owns the business and has a separate legal personality to the directors and shareholders. The liability of the shareholders is limited to the amount unpaid on any shares they hold.

Other issues to consider

There are a number of other issues which should be considered, namely:

1. Where the company is to be based (premises).
2. What intellectual property rights the company has.
3. Whether the company needs work permits for its employees.
4. Contracts with employees.
5. Contracts or terms and conditions with its customers and suppliers.
6. Agreements between the shareholders or joint venture agreements.
7. Tax issues.
8. Licences required to run the business.
9. Financing.
10. Stationery.
11. Arranging banks, accountants, insurance services and IT services.
12. Business plan.

Taking each issue in turn:

Premises

You will need to consider whether to purchase premises, enter into a lease or use virtual or serviced offices. We have commercial property agent contacts and can assist you in finding appropriate premises and then advise and conclude the purchase or lease. We can also provide virtual or serviced offices.

The name of the company must be displayed in an obvious position outside the company’s premises. The registered office of the company should be displayed in a prominent position within the company’s premises.

Intellectual Property

The company may use brand names, designs or inventions in the business. You should think about the basis of the company. For example if the business is based on a brand name you should consider registering it as a trade mark. If the business is based on an invention you should consider registering it as a patent. If the business is based on an original design of a shape or configuration of a product you should consider registering it as a design right. We can assist you in deciding on the best approach to protect any intellectual property.

Work Permits

A person who is neither a British citizen, a Commonwealth citizen with the right of abode, an EU national or a family member of such a national requires permission to enter the United Kingdom. Our emigration lawyers can assist with work permit and visa applications.

Employment Contracts

An employee is entitled to a statutory minimum statement of employment within 2 months of commencing employment. Failure to provide such a statement attracts a penalty of 4 weeks pay (capped – currently at £290 per week). The statement must contain certain specific information, such as the identity of the parties and terms relating to salary, holidays, sickness, pensions etc.

An employment contract should contain the statutory minimum statement of terms and include added protection for the employer. Employment contracts are contracts like any other. You can (virtually) agree any terms in such a contract and it will be construed using the same principles as any other contract. However, contracts of employment are special in that certain additional terms are also implied into them. In addition employees have certain statutory protection. When looking at an employment contract, therefore, one has to look at express terms, implied terms and incorporated terms.

Terms that are implied by custom and practice can cause problems for employers. These are terms that the parties are taken to have agreed between them. For example, if there is no express contractual sick pay clause but the employer has always paid salary when an employee has fallen sick, then, by custom and practice, or by conduct, the contract could be construed as including a contractual right to sick pay. In order to reduce the risk of unwanted terms being implied into an employment contract employers should require all employees to sign contracts of employment, which should be clear and concise, and incorporating flexibility where required. For example, a sick pay clause might limit payment only to those employees who have been employed for over one year and/or to a maximum payment of 7 days in any period of twelve months, or provide that any payments over statutory sick pay are entirely discretionary.

Our employment lawyers have extensive experience in the drafting of employment contracts.

Contracts/Terms and Conditions

It is important that you put in place contracts/terms and conditions for both your customers and suppliers. Terms and conditions will cover matters such as payment terms, specification for the goods or services, delivery of the goods or services, term and termination and risk for the goods. Standard terms and conditions may be appropriate for your day to day business. However you may need to consider stand alone contracts for bigger or more complex transactions. We can provide lawyers who are expert in drawing up contract terms and conditions.

You may find that your suppliers have their own contracts or terms and conditions. However you should still review them to assess their implications.

Agreements between shareholders and joint ventures

Shareholder agreements govern the relationship between shareholders in a company. The agreement is distinct from the Memorandum of Association and Articles of Association of the company. The Memorandum and Articles generally govern the constitutional and procedural aspects of the company. Shareholders agreements deal with the commercial relationship between the shareholders. It is generally recognised that the great majority of shareholder disputes would never have arisen if the shareholders had entered into a formal shareholders agreement.

Joint ventures occur where two or more businesses work together on a particular proposal. Often they form a new company and pool resources into the new company. The businesses may or may not be in the same field of business. It is advisable to have a formal joint venture agreement which sets out the obligations of the parties.

Tax Issues

There are a number of tax issues you will need to consider and you should discuss these matters with us.

VAT

The company will need to consider whether it should register for VAT. If it is making taxable supplies and its annual turnover is going to be more than £61,000, it is likely that the company will need to register for VAT.

We are able to advise on VAT matters and assist with VAT registrations and quarterly VAT returns.

Accounts and Taxation

Companies are required to file accounts and an annual return with the Registrar of Companies each year. The company’s accounts must comply with UK accounting standards and guidelines. The company will also need to file an annual tax return and, depending on the company’s size, may need to make tax payments on account throughout the year.

If the company has employees, it will need to set up a PAYE scheme with the Inland Revenue.

We are able to assist companies with their accounting, taxation and filing requirements.

Licences

Some types of business require licences to operate. You should investigate whether any such licences are required for you to operate your proposed business. We can assist you with any such investigation.

Financing

The company will need funds and you need to consider at an early stage how you will finance the working capital requirements. There are a number of ways of financing; for example shareholder equity investment, directors loans and bank borrowings.

Preparation of a business plan should assist you in assessing the working capital requirements. We can assist with the business plan if requested to do so.

Stationery

Company stationery must contain various information, including company name, company number, place of registration, address of the registered office and either all the names of the directors (forename or initial and surname) or none of them. Even if the company uses a trading name the company name must still appear on the stationery.

Invoices must show the name and registered office of the company and the VAT registration number.

Arranging Banks, Accountants, Insurance and IT Services

Although not a legal requirement, all companies will realistically need a bank account. Please note that in order to set up a bank account banks often require to see the company’s certificate of incorporation and proof of directorships. UK banks are under strict obligations to comply with the Financial Services Authority’s rules. Therefore, documentation demonstrating proof of identity will also be required for the directors and shareholders.

You should also consider insurance, some types of which are required by law. For example, if the company has employees then the company must have employer’s liability insurance in place. You should speak to an insurance broker regarding the most appropriate insurance for the company. We can recommend an insurance broker if you wish.

Depending on the company’s requirements, accountants and IT services may also be required.

Business Plan

There is no legal requirement for a company to have a business plan. However, producing a business plan will keep the business focused and should enable prudent and calculated decisions to be made. We can help you develop your business plan, which should define the business and critically analyse its strengths, weakness, opportunities and threats. The business plan should also specify if the business is to offer general services or whether it will offer specialised niche services.

You should regularly review your business plan. Reviews may be dictated by circumstances which necessitate a review, or may, for example, fall in line with the company’s year end.

PARTNERSHIP

A partnership consists of two or more people carrying on business with a view to profit. A partnership does not have a legal personality of its own. The partners in the partnership are personally liable for the debts of the partnership.

It is advisable to have a partnership agreement in place between all the partners. The partnership agreement will set out the rules governing how the partnership operates. If there is no agreement the Partnership Act 1890 will apply, which may result in a situation which you did not intend.

A partnership agreement will cover the following:

1. The Business – eg partners’ duties, working hours, holidays and decision-making procedures.
2. Financial – eg arrangements for profit sharing and drawings, accounting issues and partnership capital.
3. Ending the partnership – eg retirement of a partner, death of a partner and expelling a partner.

A limited liability partnership is a separate legal entity and an LLP member’s liability is limited. Like a partnership, the relationship between the LLP members is governed by a private agreement. If no private agreement is in place the relationship will be governed by the terms laid out in the Limited Liability Partnership Act 2000. We can assist with the formation of Limited Liability Partnerships and with the drafting of partnership agreements.

SOLE TRADER

A sole trader is an individual who runs a business on his/her own account. The business does not have a legal personality of its own. The sole trader will be personally liable for the debts of the business. A sole trader can trade under a business name, e.g. Mr Smith trading as Smith Enterprises.

Additional Information

For additional information regarding setting up a business in the UK, please contact Laurence Binge in the Dixcart office in the UK or your usual Dixcart contact.