Posted on 11.9.15 by Christian Mancier
Starting up a business is demanding, challenging and relentless, but at the same time can be hugely rewarding in the long term. Each year in the UK, around 500,000 people decide to start up their own business.
Getting your legal affairs correct and in order is vital to avoid complications and unnecessary hassle further down the line.
Key advice points when starting out in business?
If you are going into business with a co-partner(s) or a co-shareholder(s) then get the contractual documentation to govern your relationship sorted from the outset. This will ensure that you can reach an agreement in the future should a doomsday scenario occur, for example, the death of a partner/shareholder or a falling out between the partners/shareholders.
In an ideal scenario this documentation will just sit in a folder and gather dust on the shelf, however, if something does go wrong, there is documentation in place for all the parties to fall back on. This documentation sets out what should happen if one of these doomsday scenarios does occur and would have been agreed at the start when all parties were together.
Getting such documentation agreed is far easier to do so during the outset of a business venture whilst everyone is keen, enthusiastic and positive and the business has a minimal value to it. Trying to sort out such arrangements years down the line is much harder. As the years pass and hopefully the business grows significantly in value, issues may start to arise and the parties may start to entrench themselves in certain positions in which they are unwilling to move from or negotiate on.
Another really important aspect is sorting out Terms of Business right from the word go. This is especially important if you are trading business to consumer, which is a really complex legal landscape. If you are trading business to business it’s still important to get this documentation sorted to protect the business’ position and limit exposure, although this area is less regulated than the business to consumer arena.
Why does a small business need legal advice?
A relatively small investment in professional fees at the outset of a business formation can be a drop in the ocean compared to the costs of the consequences of getting it wrong. We had a client who, to save a couple of hundred pounds, formed their own company online. When they came to get some external investment it transpired they had formed (and traded through ever since) a company limited by guarantee, which is a special type of company reserved for charitable/not-for-profit companies and not one an external investor could, or would, invest in. It cost the client several thousand in legal fees to re-organise their corporate structure into a normal limited company into which the investor could eventually invest.
Consulting experts at the start can help you to get off to the best possible start and save you a lot in the long run.
Common legal gaffes to avoid
We have seen a lot of disputes between partners and shareholders where they have no partnership or shareholders’ agreement in place to govern their relationship. Such instances are often very messy, very expensive affairs which are detrimental, if not fatal on occasion, to the business concerned. Whilst proper legal documentation might not have prevented the falling out in the first place, it certainly provides a framework as to where the business partners or shareholders can turn to, setting out how such issues can be resolved going forward.
Finally, one we have seen a lot of recently, is companies who have introduced ‘alphabet shares’ on the advice of their accountant so they can pay differing dividends amongst the shareholders. Whilst this is a recognised approach, often this is simply done by re-classifying the shares as ‘A Shares’ and ‘B Shares’, but they don’t then alter the company’s constitutional documentation to expressly set out the fact that different dividends can be declared across the A Shares and B Shares.
Without such provisions, any dividends declared other than on a pro rata basis, have been illegally declared. This means they are liable to be repaid to the company. The first people are aware of this is when a company becomes insolvent and the liquidator or administrator starts asking the shareholders to personally repay monies they have technically illegally received.
Other Business Considerations
Alongside the all-important legal aspects, it’s key to market your company in the right light. This doesn’t have to be complicated or costly, but needs to be done effectively to avoid wasted time and expenses. There are a few basic elements that all SMEs need to consider to get your company up-and-running, such as, making yourself known, knowing your target market and getting social. Check this link out on TTR for more specific advice when starting up your own business.
If you are starting up your own business and would like expert legal advice or would like to act on the advice given here, give our highly experienced Corporate & Commercial team a call on 0343 507 5151 (standard landline charge), send us an enquiry to firstname.lastname@example.org and someone will give you a call at a time convenient for you.