A Bit of Legal Guidance
My name is Mark Gipson. I am a partner in the corporate/commercial department of Birketts LLP, based in our Ipswich office. For the last five years it has been a great privilege to be on the board of Foundation East, and to be part of Foundation East’s development during that time, witnessing the assistance which Foundation East can give to developing businesses.
Many of these businesses are in the early stages of their existence. Given my legal background, I thought it might be helpful to summarise some of the corporate structures that a new business might consider using and their advantages and disadvantages.
The structure of the business will depend on tax, finance, your own position and attitude to risk, costs, as well as the industry or business you are involved in.
There are likely to be four types of structures to consider - sole trader, partnerships / joint ventures, limited liability partnerships (LLP) and limited companies.
It is important to take advice before you commit to any business structure especially from a tax point of view and beware that you may find yourself already in a partnership even though there is no written partnership agreement!
At the same time as considering the legal structure you also need to consider whether or not you will be involved in a trading structure.
An agency is where you act on behalf of a named principal. The risk is that of the principal and you are merely introducing a customer to the principal. An agent will have protection under the Commercial Agency Regulations 1993.
A distribution arrangement is where you purchase from the supplier then sell on to the customer. This means that you have to bear the cost of purchase and carry the risk of holding stock before it is sold to the customer.
A franchise is where you have a licence to use a particular business model which has been proven (allegedly) - some franchises are quite sophisticated, and although you will have freedom to run your own business, you will be subject to the franchisor’s business practices, which can be both an advantage in terms of publicity and training, but a disadvantage in terms of operational limitations imposed by the franchisor.
A licence to use a third party’s intellectual property rights and to exploit in the course of trade. It is important to make sure that the licence covers the type of business you want to offer it in.
Liability & Business Structure.
In a sole trader / partnership situation there is unlimited liability for each of the partners or the sole trader. This means, in the case of partnership, that you must be aware of the contracts your partners enter into because you are likely to be liable for their actions.
As a member of the company or an LLP you may be an employee and probably a director. But as a shareholder you will have limited personal liability, namely the amount of your share capital. If your shares are fully paid up then there is no further liability as a shareholder. As a director, if you engage in wrongful trading, then you could potentially incur personal liability.
In both the case of a sole trader / partnership or limited liability company it is important to get the structure and agreements right from the beginning so as not to trip up at a later stage.
In the case of a partnership it is important to have a partnership agreement to override certain provisions of the Partnership Act 1890 and in the case of a limited company a shareholder’s agreement may be desirable to regulate the affairs of the members of the company in private rather than seeking to rely on the Model Rules (or Articles of Association). With an LLP a member’s agreement will be essential to override default provisions contained in the Limited Liability Partnerships Act, some of which are unhelpful.
At some stage in the future you may wish to sell your business; if you are selling as a sole trader or through a partnership you will be selling the goodwill and the assets of the business which will need to be identified and there will need to be an agreement for the sale.
In practice the sale of a business or of a company will involve a certain amount of legal paperwork but in theory, in the case of a limited liability company, your interest in the company could be sold by way of a stock transfer form for money.
This blog concentrates on differences arising through type of business entity. Regardless of the business structure you choose, any new business will have a host of additional concerns and considerations regardless of the form it takes, ranging from intellectual property to data protection, employment, property and contracts.
Though they may seem daunting, with appropriate consideration and research, and where necessary professional advice, the legal and commercial minefields can be overcome allowing your business to prospect and grow.
Mark Gipson, Director.