Entrepreneur

Who are you in business with?

Posted on by thelegalknow

Suspicious Package

Not all that glitters is gold, but sometimes if you want your business to grow you have to take risks, even if the glitter turns out to be coal. HOWEVER never risk who you do business with! It isn’t worth it. All it takes is one bad business partner or one bad supplier to tarnish your brand or disrupt your product/service/idea. This is why I advise my clients to always verify (investigate and confirm) the entities they contract with. When a company/person says they are something or they are someone NEVER take their word for it, always check them out yourself. Business is about money and money attracts all sorts of wannabe Warren Buffets with an abundance of international debt stowed away in their closets…behind the skeletons. Here are some simple checks that you can do for free/cheaply, to confirm the credentials of those you are in business with:

  1. Check their details on Companies House (or your country’s equivalent)- Companies House is a database of all companies and LLPs  incorporated in the UK, type in the company name or company number and you get a whole load of information for free just like that. You can see their previous company names, their registered office address, their directors’ details, whether the business is still active, when their accounts were filed (or due) and a history of its filed documents. For a few pounds you can even obtain their latest filed accounts and judge their progress for yourself!
  2. Search for disqualified directors – You can do this on the Companies House register or on the Insolvency Service register (look up your country’s equivalent), these registers will tell you if a director of a company has been banned or disqualified from being a director (if the name pops up REPORT them, they tried to play you).
  3. Check the bankruptcy and insolvency register to see if an INDIVIDUAL is bankrupt OR the register of insolvent companies to see if a company is insolvent (bust).
  4. Check their website – Does it look comprehensive? Are there any TESTIMONIALS from their clients? Does it show who is behind the business? What is their mission statement? Where are they based? Do they provide contact details?
  5. Go with your gut – Finally, what does your gut feeling tell you about the company/person? If you have any suspicions or you are uncomfortable dealing with the company/person, walk away and take your business elsewhere.

In the legal profession we call the above DUE DILIGENCE and it is a process we undergo to verify OUR OWN clients (although there are further, more thorough requirements, such as passport copies and knowing who the shareholders are etc). It is a good habit to get into. Even better, keep a record that you checked these companies/people out – if your business blows up and your lender requires an audit before increasing your loan, you will thank yourself that you kept some evidence of your good business practice.

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Get started!

Posted on by thelegalknow

fourth post

Firstly congratulations! You have an idea/product/service and you want to make a business out of it! Now it is time to get started. From the outset you need to ensure that you choose the right legal structure to help enhance your business. This post is quite hefty as it gives a brief overview of the most popular business structures. An important thing to note is that you can CHANGE your legal set up if it no longer works for you. The most conventional business structures are as follows: Sole Trader; Partnership; Limited Liability Company; and Limited Liability Partnership (LLP).

S o l e  t r a d e r

Essentially, you are a one man band; it’s just you!  Sole traders tend to operate in service sectors, such as photography, hairdressing, fitness training etc. There are no fees or forms to register as a sole trader. You can hit the ground running straight away and everything you make belongs to you. Your profits are taxed as income by HMRC, and you will have to register for self-assessment and fill in a tax return each year but that’s basically all the paperwork there is. HOWEVER the law makes no distinction between the business and its owner which means you are on the hook personally (your house, your savings etc) if the business fails. Additionally, since your profits are taxed as income you will be paying 40% as soon as they top £42,385 and 45% above £150,000 (ouch). So taxation and liability is a bit of an issue but insurance can mitigate against liability and if your business grows to mega profits you can just CHANGE your business structure.

P a r t n e r s h i p 

Partnerships are basically an extension of the sole trader model for when two or more individuals (a husband and wife for example) work together to build the business. The partnership is governed by a partnership agreement which sets out how the liabilities (risks), ownership and profits of the business are split between the partners. It also deals with what happens if one partner wants to leave for pastures new. As with a sole trader, each partner must register as self-employed and put in a separate tax return and each partner is personally responsible for all the debts owed by the business. HOWEVER, a partner is ALSO responsible for the liabilities of the other partner (yikes). This means that you really need to know who you are going into business with.

L i m i t e d   L i a b i l i t y   C o m p a n y 

Limited liability companies  are incorporated (registered) at Companies House. They require a lot more administration BUT they tend to give your business credibility and may also make it easier to obtain investment or borrow money. Most private limited companies (there are also public ones…another post) are owned by their shareholders and are limited by shares (if the business fails  each shareholder only pays the face value of its shares). It is possible to have just one shareholder (which could be you). The company is run by directors and, unlike a sole trader or a partnership, a director’s home and savings are not sought after if things go wrong. This is because the law recognises the company as a separate legal entity, effectively as a person itself. This is why Business loves limited liability companies! Your liability is LIMITED as a shareholder and the directors don’t get involved. Also limited companies pay corporation tax of 20% on their profits, very cheap compared to a potential 40% under income tax, and the company directors are taxed as employees in the same way as other people who work for the company. Limited liability companies are awesome BUT they require a lot of filing and paperwork. Too much for this post.

L i m i t e d   L i a b i l i t y   P a r t n e r s h i p ( L L P )

LLP’s are a relatively new creation in UK business law and are especially suited to professional services companies like lawyers and accountants. They are a hybrid between limited liability companies and partnerships as they offer limited liability (members’ assets are protected as liability is limited to however much members have invested in the business) combined with the tax regime and flexibility available to partnerships. The number of partners is not limited, however at least two partners have to be ‘designated members’ responsible for filing annual accounts. Like limited liability companies, LLPs also have to register at Companies House and there is a members’ agreement stating what share of the profit each member receives (draft this carefully).

So that’s it in a very small nutshell. When you are starting your business it is important that you have an idea of these business structures so that you can ask the right questions and encourage tailored legal advice from your lawyer. I’ll write some more detailed posts on each of the above however please drop me an email if you want to know anything specific.

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