Anybody can start a new venture and fortunately for the UK economy the entrepreneurial spirit is alive and kicking.
We all know somebody who has taken risks to make a business dream come true, often with the backing of a friend or close family member who has spare cash to invest either for altruistic reasons or with an eye for a significant return on their investment.
What we don't hear about are the dreams that become nightmares that could have been avoided by taking professional advice at the outset.
There are two specific areas I would like to bring to the attention of new businesses and their backers, namely the use of limited companies (or limited partnerships) and the importance of shareholder agreements.
The UK has one of the world's simplest and cheapest limited company registration schemes but many people ignore this and commence as sole traders or a partnership due to ignorance about company law.
I have been a staunch advocate of using a limited company as an insurance policy. In todays litigious and regulation driven society a limited company could end up saving you from being "wiped out". As a sole trader or partner, when faced with a claim even the shirt on your back could end up going as part of a settlement. As a limited company the claim cannot extend beyond the company's assets in normal circumstances. Whatever risks an external "sleeping" investor is letting themselves in for I am sure that facing a liability beyond their initial investment is not one of them.
When one looks at the complete picture the compelling factor, even in the simplest of scenarios , is very often the peace of mind that the investors' personal assets and savings are safe from the clutches of creditors and troublemakers. A sole trader or partner is an easy target, a limited company is not.
Other advantages of incorporating a business as a limited company include an image in the business community that you are more "serious" , a feeling of confidence amongst potential creditors and customers that they can check you up on the public record and a greater ability to attract outside investors. Aside from these there can be tax advantages but the downside is the increased compliance burden and for some, the loss of privacy, which for a sleeping partner may be an important consideration.
When one has an external investor or co-shareholder in the company it is vital to ensure there is a shareholders' agreement in place. In essence this ensures that in the event of a dispute there is a readily available point of reference leading to a pathway for resolution. This is all the more important where the business is bankrolled by a friend or family member. Some more senior family members who are seasoned businesspeople may rely on their previous good fortune of dispute-free experiences but when they are no longer in control the legal landscape can change dramatically.
There are rarely disputes at the outset when the company is formed. Everything is "hunky-dory" but the harsh reality is that greed and ego often creates strife and brings down a business, especially where the main worker is not the main investor. People have short memories and even a few days later may have difficulty recalling what was agreed upon over brandy and cigars at a family meal in the early hours. Consider further what would occur should the investor die leaving a number of heirs as shareholders.
A shareholders' agreement is best prepared by a solicitor and will cover areas such as what to do if a shareholder wants to leave (possibly to start up in competition), whether a dispute is to be arbitrated or heard in court and prevention of minorities from being squeezed out , amongst other things. Each scenario is different so don't try and crib from another business although you may wish to use their model as a point of reference from which to start.
Written formal agreements are also good at making unscrupulous shareholders think twice and ensures an ongoing commitment from all parties. Even if you decide to remain as a partnership you should still have a comprehensive written partnership agreement, similar to a shareholders' agreement.
Whatever you decide upon, remember that some areas of paperwork should not be left until later as shattered dreams and relationships are not easily repaired.
To order a UK limited company formation online, please visit FormationsDirect.com
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