FAQs about Start-Up/Small Business Advice
SMALL BUSINESS FAQ – ISLINGTON LAW FIRM
What are the legal elements of a contract ?
A contract is a legally binding agreement between two or more parties if there is:
- an offer
- acceptance by offeree of that offer; and
- an intention to create contractual relationship.
An agreement is made when an offer is met with an unqualified acceptance. The parties must have the necessary capacity and must intend it to be legally enforceable in the courts. The agreement should be in writing. However, the English law of contract does not require formalities. Oral contracts can be binding and there is no particular form of words required.
All contracts can be oral apart from contract relating to land (although lettings not exceeding three years can be oral).
What different types of business entities are there ?
There are 4 main types, being :-
- Sole trader – you are self-employed with no special legal structure,
- partnership – (two or more people working together) you share the profits and losses
- Limited company – this is a separate legal entity distinct from its shareholders, directors and employees
- Limited liability partnership – is again a separate legal entity
Advantages of operating as a sole trader
- You can keep simple unaudited accounts
- National Insurance is low
- Unless your earnings are high, total tax payments can be lower than if you had formed a limited company
Disadvantages of operating a sole trader
- personally liability for all business debts
- fewer social security benefits e.g. if you stop trading, you cannot claim unemployment benefit
- It may be harder as a sole trader to sell the business or pass it on
Partnership
A partnership has similar advantages and disadvantages to a sole trader, but there are two other factors to take into account
- Each partner is personally liable for all the business debts of the partnership (other than tax on profits) even if the other partner has caused them.
- You may be able to raise money by introducing new partners. You can set up most partnerships with very few formalities.
Advantages of setting up a limited company
- It is easier for you to raise large sums of money or to sell a part of the business
- There can be tax advantages for high earners through keeping money in the business or making pension payments
- liability is generally limited to the amount invested in the company by buying its shares
Disadvantages of setting up a limited company
- Annual accounts are generally more complicated
- National Insurance payments are higher
- If you decide to cease trading it can be more difficult and expensive to wind up
Limited liability partnerships
It is now possible to set up a limited liability partnership which, despite the name, is a corporate body with its own legal identity and capacity. It has the organizational flexibility of a partnership and is also taxed as a partnership. A limited liability partnership must be registered at Companies House and again you may want to use an accountant, solicitor or registered agent to deal with these formalities for you.
What are the advantages of buying a franchise ?
Buying a franchise brings a tried, tested and successful product and the benefits of experience and support of the company offering the franchise. Successful franchise operations have a much lower failure rate than completely new businesses and often exclusive rights to your own territory
What are the potential disadvantages of buying a franchise ?
The cost may be more than meets the eye, there can be continuing management fees to pay and other add ons, there are generally restrictions on the business and exposure to risks outside your control e.g. the franchisor going ‘bust’
What are the formalities necessary for registering a limited company ?
If you intend to trade as a sole trader or partnership, you do not need to register a business name. However, if you decide to form a limited company you must register the business with Companies House. The only other form of registering a business is when you inform the HM Revenue & Customs.
Is it necessary for a partnership to have a partnership agreement?
It’s always best to have a business partnership agreement, which contains many important clauses and generally provides, amongst other things, for what will happen if one of the business partners dies, the partners fall out, rules about how the business should be run and how the partnership can be dissolved and how the assets and liabilities allocated.
What are the options for taking money out of a company?
In principle, if you work in the company and are a shareholder you can either pay yourself by salary (which could be in the form of a bonus or other remuneration) or dividend. The various pros and cons of deciding between salary and dividend or a combination of both, are :-
- If you are paid a salary from your own company, normal PAYE rules apply.
- If you are paid a dividend, your company doesn’t have to pay any tax over at the time of making the distribution. This is because dividends can only be paid out of profits which have already been taxed. In principle, dividends are now a more tax-efficient way of withdrawing profits from a company than salary.
- If you have lent money to your company and it is paid back there may be no tax involved with any such repayment.
What are the basic requirements for a director and secretary of a limited company ?
Every company is legally required to have :-
- at lea
- There is no longer a requirement to have a company secretary (Section 270 The Companies Act 2006), but it is still available as an option.
- The company director(s) is/are responsible for running the company.
- The Company Secretary if appointed, must ensure that the company conforms with current legislation, for instance they are responsible for filing legal paperwork relating to the company with companies house (such as changes of director, shareholders and addresses).
Can anyone be a company director?
The basic answer to this is yes, subject to :-
- not been disqualified from doing so by a court
- an individual must be at least 16 years of age in order to be appointed as a director of a company
What is a company’s registered office?
The registered office must be an address in England and Wales, or Scotland where legal documents can be served on your company. This address is kept on the Companies House database and is available for anybody to inspect free of charge. This address must also be written on all your company correspondence such as letterheads and invoices.
What are company’s registers ?
A limited company must keep registers of the following :-
- Shareholders
- Directors
- Company Secretary (if appointed)
- Directors interests
- Mortgages and Charges
- Register of Debentures
- Minutes of Directors and General Meetings
- Share Certificates
What are the basic things I need to know about an LLP ?
An LLP is a separate legal entity and the liability of the members will be limited. Under certain circumstances, however, claims for economic loss can be made against individual members for negligence
Management
The business is controlled by the ‘designated members’, who have a similar responsibility to a directors / secretary of limited companies and the ‘members’.
Finance
Capital is provided by the members, LLP’s are similar to partnerships or sole traders in this respect.
Profits
Income paid to the members is closer to drawings by partners than dividends paid by companies.
Tax
An LLP will be taxed as a ‘Partnership’. The members will provide working capital and share any profits.
What are the main considerations in potentially changing from a partnership to an LLP ?
- The main advantage of LLP status is that in most cases it allows members to limit their liabilities to the amount of their fixed capital, in the same way as company shareholders can, while still preserving the tax advantages of a traditional partnership.
- LLPs over a certain turnover, like limited companies, must file annual audited accounts with the registrar of companies. These accounts are accessible to the public in the same was as for limited companies. For ‘small LLPs’ a concession is available allowing them to file a simplified balance sheet and their profit and loss account remains confidential.
- It is also important to bear in mind that if a partnership has outstanding debts or liabilities, there can be difficulties in transferring these into an LLP, as creditors often prefer the fact that partners have personal liability. Debts may need to be cleared or new personal guarantees given in these circumstances