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BUSINESS START-UP GUIDE

This part of the site should help anyone starting up a new business. Trading a new business for the first time can be a bewildering experience for the unprepared.

The key thing is to get good advice early to avoid problems later.

You will need a good team. You will need to consider many things, depending on the type of business. These will almost certainly include all the things set out here.

Business medium - company, partnership or sole trader?

The first decision is whether the business should be a limited company or a partnership/sole tradership.

Where a company is to be formed, it will be the company which carries on the trade and which will own some or all of the business assets. A company is an "artificial person". The people involved own shares in the company and the company carries on the business. The company has one or more directors and it is the directors who make day to day decisions on the management of the company.

Unless there is misconduct or personal guarantees have been given, the shareholders and directors are not generally liable for the debts of a company with limited liability.

Unless a company is formed:-

• Where one person carries on business he is said to be a sole trader.
• Two or more people trading together are a partnership.

The decision on whether to trade the business as a limited company is quite complicated and requires a combination of both legal and tax advice so the proposed accountants will need to be consulted.

Where a business is traded through a limited company, a new company is formed and it is that company which will own the business and run it. The individuals behind it will be shareholders in the company and may well be directors of the company as well.

Tax apart, the main advantage of running a business through a company is limited liability. The company becomes liable for the debts of the business and if for some reason the debts and other liabilities are greater than the assets so that the company becomes insolvent, the members themselves are not normally liable for the rest of the company’s liabilities.

On the other hand where the business is carried on by a sole trader or a partnership, the proprietors themselves are liable for the debts of a business without limit.

Limited liability, especially in a fledgling business, can however be less favourable than at first sight because:-

• The company will probably have borrowings from its bank and a bank will normally require personal guarantees from the directors unless, which is unlikely, the company can put forward adequate security from property it owns.
• If the company has leasehold premises most landlords will ask for a personal guarantee of the company’s liabilities because the company will have no track record and the landlord will seek protection in the event of the company failing.
• Suppliers also may seek personal guarantees if the amount of credit to be extended to the company is significant.

However limited liability can be of value despite these restrictions.

The following table make help in making a decision as to whether to operate a new business through a limited company. However every case is different and in many cases other factors will apply:-

Premises

Nearly every business will need premises. A new business may buy or more likely rent its first set of premises. Sometimes the premises will already be owned by the proprietor. If that is the case and the business is to be run by a limited company, the owner of the company may wish to retain ownership of the premises and rent them to the company. In that way he may protect the property from creditors if the business fails.

If premises are to be rented then the business will need to consider whether it needs a short tenancy or a long lease. If the business is to be a tenant it will need advice on the complexities of landlord and tenant law, how much it is committed under the terms of any lease agreement and what it can do if it wishes to relinquish the premises.

Further advice on basic leasehold law for business premises can be found in our  Business Leases Guide

The occupier of premises has a liability to ensure that they are reasonably safe. If someone on the premises is injured because of the state of the premises the occupier may well be liable. Insurance is essential.

The occupier of business premises will be liable to pay business rates to the local council. He may require advice as to rateable value because business rates can be a significant outgoing.

It is essential that premises are insured and also that the contents of the premises are insured. If premises are rented they may be insured by the landlord although normally the tenant will be expected to reimburse the landlord with the cost. If premises are freehold then the owner should insure them.

An expense not to be overlooked when purchasing premises is stamp duty. This is a government tax based on a percentage of the price paid or rent passing.

Employment Law

Every new business will eventually need to employ someone and the owners need to have a basic knowledge of employment law and a source of good advice. A experienced solicitor is a good choice of employment advisor.

There is a basic guide to employment law in our Employment Law Guide  and there is a note on requirements for contracts of employment our page relating to employment contracts. The provision of contracts of employment to employees is a legal requirement.

Terms of Business

It will be desirable for many businesses to have written terms agreed with their customers setting out the basis on which the business trades. While this will not be a requirement in every case, some businesses will find it essential. One of the sources of disputes between businessmen is a failure to define the terms on which they will do business with each other. When businesses fall out not only is a good relationship often destroyed but large sums of money can be wasted in resolving the dispute. Good professional advice taken early on can avoid this happening. It is only common sense to define your business relationships with other people so that customers know what to expect and the business stands less chance of being sued because of unrealistic demands by customers.

Regulatory Requirements

Every business however small is subject to some form of regulation and these days there seems to be more and more of it. Certain specialist businesses will be regulated by professional bodies or trade associations. All businesses will have to comply with general legislation including planning, health & safety, fair trading, legislation against discrimination, disability discrimination law and so forth. Shops, offices and factories all have legislation which affects them so as to provide proper working conditions for employees. Business premises will require to be inspected by the fire service. Some businesses will have special requirements for licensing such as public houses or gaming establishments.

Financing the Business

Solicitors can provide initial advice on sources of finance, methods of raising capital and making an application to the bank or other financier for funding. The solicitor can also advise on selection of an accountant who will provide additional assistance in relation to funding applications.

Borrowing and cash flow

While the proprietor of the business may well provide some of the funding which the business will need, it is very likely that a new business will require to borrow funds from a Bank or other financial institution and that the lender will require security for the loan.

The lender will normally consider at least two things:-

• Serviceability - can the borrower afford to service the loan i.e. comply with its repayment terms?
• Security - will the loan be adequately secured?

A business borrowing significant sums will be expected to satisfy the lender on these matters and to prepare cashflow projections to demonstrate that it will be able to comply with the terms of the facility which it seeks.

An Accountant will need to be retained to prepare a business plan and cashflow forecast for prospective lenders

Security for borrowing

In the case of a partnership or sole trader, security will usually be taken by way of a mortgage over property such as a house or business premises. Sometimes the lender will seek a guarantee of the liabilities of the firm by a third party.

If the business is a company, then security may be taken over the assets of the company by what is called a debenture. This will cover all the assets of the company not just any freehold or leasehold property which the company may own.

In the case of a new company, the Bank will normally seek a guarantee from the major shareholders and that the guarantors provide security, usually by way of a charge on land or houses to back-up the guarantee.

Legal advice in all these matters will be essential both for the proprietors of the business and for any asked to provide a guarantee.

If the Bank seeks a charge over a house belonging to one of the proposed guarantors and the house is occupied by the guarantor’s spouse, then the spouse will have to approve of the transaction and will require to be given separate legal advice.

Keeping accounts

Every business must keep proper accounts. This is an inland Revenue requirement as well as being essential to knowing how the business is going.

In the case of a business operated by a company, the company will pay corporation tax on its profits and the liability to settle this tax is that of the company and not of the shareholders. If the shareholders receive dividends or are paid salaries, they will be liable to income tax on the amounts they are paid.

It is important to take advice from an accountant on setting up a proper business accounting system which will enable the business to know where it stands at any given time and which will enable the accountants to prepare annual accounts.

Where the business is run by a company, the company has to file its accounts each year at Companies House. These accounts are open to public inspection. A partnership or sole trader does not have to file accounts.

Every business will have to provide its annual accounts to the Inland Revenue and also in practical terms to its Bank.

Tax

In the case of a partnership or sole trader, income tax is payable on the profits of the business and charged to the sole trader or to the partners. In the case of a partnership, the tax liability is split among the partners according to their respective shares in the profits of the business.

Once the business turnover exceeds certain limits the business becomes liable to charge and pay VAT. In very basic terms, the system of VAT is that the business will charge VAT to customers on supplies of goods or services unless those goods or services are "exempt" or "zero rated". The business will then account to HM Customs and Excise for the total amount of VAT charged to customers of the business.

The business will however be entitled to reclaim the VAT which it has paid in producing the those goods or services except in so far as VAT has been paid in order to provide exempt goods or services. The amount of VAT which is reclaimable under these provisions is then deducted from the amount of VAT which the business has charged its customers.

Businesses account for VAT quarterly.  The year is divided into 4 VAT quarters ending on the last day of a month.  For example a business might have VAT quarters ending on 31st January, 30th April, 31st July and 31st October in each year.  At the end of each VAT quarter the business must make a VAT return to Customs and Excise for the three months up to the end of the VAT quarter.  The VAT return will show the amount of VAT payable by the business (or in certain cases repayable to the business).  The payment will then be due by the last day of the month following the end of the VAT quarter.  In the example given a VAT cheque would have to be sent by 28th February, 31st May, 31st August and 30th November.

Periodically, Customs and Excise will carry out a VAT inspection.

If the business employs anyone it will be required to operate the Pay As You Earn or PAYE system in relation to employees’ income tax and national insurance.

Tax tables or a computer system can be used to work out the amount of income tax and national insurance to be deducted from each employee's wages and calculate the amount of the employer's national insurance contributions. This will determine the sum which the business will have to pay to the Inland Revenue. Procedures apply when employees join and leave the business and appropriate professional advice will be required in order to set up systems to comply with the employer’s obligations in this respect.

Tax is exceptionally complicated and proper advice should always be taken.

Protecting Goodwill

Every business will need a name. Under UK law only company need register its name and it is not necessary to register the name of a partnership or sole tradership.

When setting up a new business it is essential to ensure that the name is not so similar to the name of another business that confusion between the two is likely to arise. If this happens the established business is likely to take action to protect its interests.

It will probably be desirable for the new business to have a website and when choosing a name it may well be desirable to pick a name which the business can use as the address of its website. The business will need an internet service provider who should be able to register a suitable name.

The business may wish to register a trademark to distinguish its goods from the goods of others and to give the business an essential identity.

If the business or its proprietors invent some new product or process, the business may well wish to apply for a patent in respect of that.

Some businesses will require advice on copyright. Copyright exists when original writing is created and generally the copyright belongs to the person who created the work. Copyright does not require to be registered in order to exist. Copyright exists in a wide variety of material including books, music, photographs, computer programmes and so forth. A business may require legal advice as to avoiding infringement of copyright belonging to others.

Managing a company

Our Company Law Guide contains a wealth of material on managing a small company.

Insurance

Every new business will require numerous different kinds of insurance which may conveniently be considered under various headings:

Premises

The business premises should be insured against fire and other risks. The business will have to decide whether to insure against terrorism at additional cost. A buildings policy will compensate the owner if the building is destroyed or damaged. If the premises are let, the landlord will normally insure and charge the tenant the insurance cost but legal advice should be taken to check the position.

It is necessary to insure the building in its "full reinstatement value" which means that the insurance amount should be the amount which it would cost to rebuild the building. That figures may not be the same as the value of the building. If the building is under-insured then an insurer may be able to avoid paying the full amount of any claim.

Contents

In addition to insuring the building the business should insure its contents, that is the machinery, equipment and fixtures & fittings in the premises. It will also require to insure stock-in-trade. Once again these items should be insured for what it would cost to replace them which is not necessarily the same as their value. While in the case of premises held on lease the building may well be insured by the landlord, the landlord will not normally insure the contents.

Public Liability

The business should insure against liability to members of the public caused by the business itself or any of the employees of the business in the course of their employment. A person or company carrying on business will be liable for the acts of the employees of the business which are committed in the ordinary course of their employment. As an example of this, if a bricklayer employed by a building company dropped a brick on a passing member of the public, the employer as well as the builder would be liable for the bricklayer’s negligence. The business should take out an adequate public liability policy to cover this sort of risk. In addition the business should consider the need for property owners liability insurance. Certainly if the business itself owns the premises outright property owners liability cover is essential. The business should take the advice of an insurance broker as to what cover is required having asked the broker to review fully the way the business operates and to advise on the risks it should insure against.

Loss of Profit

If the building in which the business carries on is burnt down not only will the building require to be rebuilt but the business will suffer loss of profit while the building cannot be used an generally as a result of the disruption to the business caused by the damage. Business should make a realistic assessment of what would be lost in the event of this sort of calamity and take out insurance to cover profit lost. Once again an insurance broker can assist a businessman in assessing the amount of cover needed.

Professional Indemnity and Product Liability

If the business is negligent in providing services or provides defective products it may be liable to customers. Every business should consider its insurance needs in this area. Such insurance benefits not only the businessman but also the customer who can deal with the business with a greater degree of confidence. This sort of insurance is not generally compulsory but it must be borne in mind that a large claim not covered by insurance would also certainly jeopardise the viability of the business and thus the financial health of its owners. It does not make much sense to spend many years developing a healthy business to leave it at risk because of inadequate insurance arrangements.

Employer’s Liability

Every business must take on insurance to cover its liabilities to its employees and policies are readily available. Once again appropriate advice should be taken from a reputable insurance broker.

Fidelity Insurance, Key Man Cover, Directors Liability

Businesses should seek advice from their insurance broker as to whether this may be appropriate.

Be aware that:-

• Fidelity insurance covers the business against dishonesty of an employee.
• Key man cover is to provide benefit in the event of a key employee or director being unavailable to work for the business for whatever reason may be specified in the policy. This could cover the business if a key member of staff died or was ill and unable to work.
• It is possible to obtain insurance against directors’ liabilities and this should be seriously considered. The directors must bear in mind that while directors are not in general terms liable for the debts of a company they may be liable as original wrongdoers and may wish to cover this liability by insurance.

Motor

Every driver must insure against his liability to others with whom he may be involved in an accident. The general principle is that if an accident is caused by the negligence of one person, that person will be liable to compensate the others involved in the accident. Where a vehicle is driven by an employee in the course of his business, not only will the employee be liable for his negligence but the business will as well. It is therefore essential to make sure that all employees are covered by a policy which covers the driver for driving on business. Many policies simply provide cover for what is called "social, domestic and pleasure" and will require to be extended. Every business should set up a mechanism by which it checks that insurance is in place and consider taking out an overriding policy to cover this risk.

General Principles of Insurance

In every kind of insurance it is essential that all relevant material is disclosed to the insurer. This would include past claims, criminal convictions and any factors likely to affect the insurer’s decision on whether to cover a particular risk and at what premium. If relevant information has not been given to the insurer when the policy is taken out, the insurer may be able to avoid liability in the event of a claim. This could be disastrous for the business. Every business should avoid being in a situation where a policy is likely to be repudiated by the insurer in the event of a claim.

It is essential for a business to have a reputable and competent insurance broker. In general terms insurance brokers are remunerated by commission on the policies they arrange. This means that the insurance broker has an interest in selling his client as much insurance as possible. It may be possible to arrange to receive brokerage advice on a fee basis rather than commission. However provided that the insurance broker chosen is competent, reputable and trusted, many businesses will be satisfied with their broker being remunerated in the conventional commission-based way.