Preparation and planning is crucial. Choosing the right legal structure is arguably the most important decision of all. So if you want your business to function in an efficient and productive way (who doesn’t?), take time to get it right and take advice if you need it.
If you are setting up as a sole trader, for example, there is no protective barrier between your personal assets and business debts. This can leave you horribly exposed if things don’t work out, and it’s is a very good reason to consider setting up a limited company as a trading vehicle. If you’re working with others, you can consider a company (where each of you can hold shares) or a limited liability partnership. There are different tax consequences with each route, and these should be worked out at the beginning.
You will need terms of business, setting out clearly what you will do for your customers and what you expect in return. This can help limit your liability and ensure you get paid for the goods and services you provide. There are restrictions in law that you can’t ignore, for example the right of consumers to change their mind after they’ve entered into a contract with you. It really is important to understand your legal obligations, in particular when you’re dealing with consumers, and set out clearly in your terms of business what will happen in each situation. Clarity helps avoid dispute, and this will be good for you and your customers. You should also consider insurance, if available or indeed necessary in your particular line of work.
The biggest challenge of all might be to step back and ask ‘What if?’ It’s especially important when establishing a business with a partner, family member or friend. You might be on the same page now, but what about tough decisions ahead? These might include decisions around product development, growth plans and the future direction of the business, staffing, capital investment, profit shares and succession planning. What if you don’t agree?
A shareholders’ agreement or partnership agreement can certainly help, by setting out each party’s rights, responsibilities and typically a range of matters requiring majority approval or unanimous approval. Such an agreement can and should be tailored to your individual needs. It can also include a deadlock resolution procedure to help you move on from a disagreement and not be trapped by it.
Change is a certainty (along with death and taxes) and you have to be ready for it. Just look at the impacts of Coronavirus this year. Consider what might change in the life or your business, not just external social, economic and environmental changes, but internal changes too. What if you or your partner want to retire or leave the business in future? If you haven’t discussed or prepared for this, how will you value the business and the leaver’s share? Is there anything to stop a leaver setting up a new business in competition? Without an agreement in place, the default legal position may not suit you.
An agreement can also seek to address one topic no-one wants to deal with – the death or incapacity of a partner or shareholder. Can the business continue without them? What will happen to their share? Can the business afford to pay it out quickly, or will it need time? It’s important to think ahead and agree how this will be addressed. By doing that, you can make it less painful for surviving family members and also reduce the impact on the business. You don’t want to find yourself bogged down in a messy, painful and costly dispute.
So put a suitable written agreement in place. Sign it, store it somewhere safe and then forget about it. All being well you might not need to look at it again, but if you do, you’ll be glad it’s there.
Alan Gilfillan is a Partner in the Commercial law team at Balfour+Manson Solicitors