ESTABLISHING A SMALL BUSINESS
Our services include a full range of legal advice and assistance for those committed to starting up their own business. Without such advice establishing a small business can be time consuming and may present a variety of problems.
Maxwell Hodge are able to provide assistance with :-
- The business medium – sole trader, limited company, partnership or limited liability partnership?
- Premises – buying or letting?
- Employment issues
- Running the business – terms and conditions of business, distribution and agency agreements and the like.
- Dispute resolution – bringing and defending claims and recovery of debts.
- Statutory registrations – VAT, PAYE, Data Protection, Consumer Credit
BUSINESS MEDIUM – SOLE TRADER, LIMITED COMPANY, PARTNERSHIP OR LIMITED LIABILITY PARTNERSHIP
Sole Trader
A sole trader is an individual trading in business on his or her own account. No legal formalities are required to commence trading. . The accounts of a sole trader need neither be audited nor publicly disclosed. A sole trader is fully liable for all debts and liabilities of the business and therefore puts personal assets at risk if the business becomes insolvent.
Limited Company
A private limited company provides the owners of the business with limited liability so that in the event of the company becoming insolvent the owners may not be responsible for the debts of the company although, in certain circumstances, a court can order directors to pay some or all of the debts. Further, the major creditors of a small business are usually its Bankers and Landlord both of whom are likely to have insisted on personal guarantees from the directors thereby making them personally responsible for those specific debts.
A company must have at least one director and a company secretary. If the company has only one director that person cannot also be the company secretary.
The role of director carries with it certain duties and responsibilities. The company must have a “registered office” in England and Wales to which notices affecting the company can be sent although the address need not be that from which the company trades. A company may trade under any name but a private company’s name must end with the word “limited” and the name cannot be the same as that of an existing company.
A company limited by shares must have a share capital which can be as small as required. The company must have a minimum of one shareholder.
The company must state on its business letters and other stationery either the full names of its directors or none of their names. The company’s registration number, its corporate name and its registered office address must be shown.
An Annual General Meeting (AGM) must be held in each calendar year to approve the accounts for the previous year, to approve any dividend awarded and to appoint auditors for the following year. Limited circumstances exist for shareholders of a private company to postpone the holding of an AGM.
All documents filed with the Registrar of Companies are open to public inspection. Most companies must have UK Accountancy Auditors although there is an exception for small companies with low turnover.
Directors will be employees of the Company and their salary will be subject to deduction of PAYE and national insurance.
Partnerships
Rights and responsibilities of the partners are governed by the agreement which exists between them and/or the Partnership Act 1890. A written partnership agreement is recommended to include issues such as arrangements for sharing of profits, how decisions are to be made for the running of the partnership business and what happens when one of the partners dies or retires from the business for any reason.
Partners are personally liable for debts of the firm and the liability of each partner is unlimited so that creditors can recover their entire debt from one partner. Every partner is an agent of the others and may, on behalf of the partnership, enter contracts, incur debts and dispose of partnership property in the ordinary course of the partnership business.
Save for partnerships of more than twenty individuals all business letters and certain other documents must show the names of all the partners in the firm and provide a business address for service.
Accounts can be prepared in a simple form with no specific accounting, auditing or disclosure requirements.
Limited Liability Partnership (LLP)
An LLP can be incorporated by “two or more persons associated with carrying on a lawful business with a view to profit”. It is, like a limited company, but unlike a partnership, a separate legal entity and may enter into contracts and hold property in its own right. Assets, profits and liabilities all belong to the LLP.
The members of an LLP are treated, for tax purposes, like a partnership. Members are taxed individually and the assets of the LLP are treated as owned by the members.
The name of the LLP cannot be registered if a similar name already exists on the company’s index or the LLP names index. The name of the LLP must end with the words LLP and must appear on any business stationery along with the registered office, registered number and place of registration.
There must be at least two members of an LLP at all times failing which the limited liability is lost. There is no upper limit on the number of members.
The relationship between members is governed by express agreement, or by the provisions of the Partnership Act (and members act as agents of the LLP).
Members of an LLP have no contractual liability to the creditors of the business and are protected beyond their capital commitment save in certain circumstances similar to those as with a limited company.
An annual return must be filed with audited accounts.
PREMISES
Home based?
It may be possible to run a small business from your home. This can, however, create the following difficulties :-
· There may be restrictive covenants registered against the title to your property preventing you running a trade or business from your home.
· Planning permission may be required for trading from your home as it may amount to a change of use for planning purposes.
· The mortgage on your property may restrict the use of your home for business purposes.
· Although you may be able to claim a proportion of outgoings as a business expense for tax purposes there are likely to be capital gains tax implications when you sell the property.
· Your neighbours may not be impressed with your running a business in a residential area.
Renting Property
Relatively few businesses will be capable of being run from home. Most will require commercial premises from which to trade. In some circumstances small “serviced accommodation” often providing other services (e.g. fax, secretarial services, reception etc) may be available on monthly terms. It may be sensible to have a solicitor consider any documentation provided in such circumstances but no significant expense is likely to be involved.
For many small businesses, however, a formal lease of premises will be necessary.
Specialist legal assistance should always be taken as to the meaning and effect of any lease being taken. For example provisions will likely exist dealing with :-
Rent
Most leases will contain a rent review clause (a provision allowing the landlord to increase the rent at fixed intervals) which may not only affect cash flow but also the ability to sell on the lease to somebody else. A rent free period at commencement of the lease may be negotiated although the effect on rent review will need due consideration. Provision will be required for suspension of rent payments if the premises become unfit for use.
Dilapidations
You should be aware of your responsibilities to the landlord with regard to the condition of the premises. You will need expert advice as a tenant may be required to put the premises in a better condition than they were at the start of the lease unless appropriate clauses are inserted in the lease at the outset.
Length of the lease
You may, with expert assistance, be able to negotiate the length for which the lease is being taken and reduce your potential liabilities. A break clause may be inserted giving you (and possibly the landlord) an option to terminate the lease at specified periods during the life of the lease.
Guarantees
You may be required to provide a personal guarantee if the lease is in the name of a limited company. You may then become personally liable for non-payment of rent or breach of other covenants and should seek specialist advice before entering such a guarantee.
Selling the lease
You will need to ensure that the lease allows you to dispose of the premises should you wish to do so. Leases will often contain clauses preventing disposal without the landlord’s agreement to the proposed new tenant. A landlord can specify conditions to be fulfilled before consent will be given.
As a tenant you may be taking on a considerable liability by renting premises and the importance of seeking appropriate legal advice cannot be over emphasized.
Buying business premises
The purchase of property usually involves a considerable capital expense and may require a mortgage although the business will then own a valuable capital asset.
It is always sensible to instruct a Chartered Surveyor to carry out an inspection of the property before purchase. If defects are found it may assist with the negotiation of a lower price with the seller.
An average property purchase transaction proceeds in stages as follows :-
- Submission of searches – your Solicitor will submit searches to the local authority to check whether there are any public works affecting the property or whether any planning restrictions exist. Additional searches and enquiries may be submitted in particular circumstances.
- Title investigation. After receiving the contract from the sellers Solicitor the documentation is checked and enquiries submitted. The sellers title will be verified to ensure that he or she is able to sell the property and in order to identify any restrictions or adverse rights affecting it.
- Receipt of mortgage offer.
- Written confirmation of any mortgage advance will be received from the bank or building society.
- Exchange of contracts. This takes place after a deposit (usually 10% of the selling price) is paid and each party has signed and exchanged copies of the purchase contract. Once contracts have been exchanged the sale is legally binding. If a buyer fails to complete without justification the seller is entitled to keep the deposit.
- Receipt of mortgage funds. The funds are received from the bank or building society to enable the property purchase to be completed.
- Completion. The balance of the purchase price is paid and ownership and possession of the property is transferred to the buyer.
After completion stamp duty is paid and the title to the property is registered at the Land Registry in the name of the purchaser.
Following return of the deeds from the Land Registry these are submitted to any mortgage lender for safe keeping.
There are taxation implications involved in the purchase of a property by a company. Full legal advice should be sought as to the implications.
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