Establishing a Small Business

Our services include a full range of legal advice and assistance for those committed to starting up their own business. Without such advice establishing a small business can be time consuming and may present a variety of problems.

Hodge Halsall are able to provide assistance with :-

• The business medium – sole trader, limited company, partnership or limited liability partnership?
• Premises – buying or letting?
• Employment issues
• Running the business – terms and conditions of business, distribution and agency agreements and the like.
• Dispute resolution – bringing and defending claims and recovery of debts.
• Statutory registrations – VAT, PAYE, Data Protection, Consumer Credit

BUSINESS MEDIUM – SOLE TRADER, LIMITED COMPANY, PARTNERSHIP OR LIMITED LIABILITY PARTNERSHIP

Sole Trader

A sole trader is an individual trading in business on his or her own account. No legal formalities are required to commence trading. . The accounts of a sole trader need neither be audited nor publicly disclosed. A sole trader is fully liable for all debts and liabilities of the business and therefore puts personal assets at risk if the business becomes insolvent.

Limited Company

A private limited company provides the owners of the business with limited liability so that in the event of the company becoming insolvent the owners may not be responsible for the debts of the company although, in certain circumstances, a court can order directors to pay some or all of the debts. Further, the major creditors of a small business are usually its Bankers and Landlord both of whom are likely to have insisted on personal guarantees from the directors thereby making them personally responsible for those specific debts.

A company must have at least one director and a company secretary. If the company has only one director that person cannot also be the company secretary. The role of director carries with it certain duties and responsibilities.

The company must have a “registered office” in England and Wales to which notices affecting the company can be sent although the address need not be that from which the company trades.

A company may trade under any name but a private company’s name must end with the word “limited” and the name cannot be the same as that of an existing company.

A company limited by shares must have a share capital which can be as small as required. The company must have a minimum of one shareholder.

The company must state on its business letters and other stationery either the full names of its directors or none of their names. The company’s registration number, its corporate name and its registered office address must be shown.

An Annual General Meeting (AGM) must be held in each calendar year to approve the accounts for the previous year, to approve any dividend awarded and to appoint auditors for the following year. Limited circumstances exist for shareholders of a private company to postpone the holding of an AGM.

All documents filed with the Registrar of Companies are open to public inspection. Most companies must have UK Accountancy Auditors although there is an exception for small companies with low turnover.

Directors will be employees of the Company and their salary will be subject to deduction of PAYE and national insurance.

Partnerships

Rights and responsibilities of the partners are governed by the agreement which exists between them and/or the Partnership Act 1890.

A written partnership agreement is recommended to include issues such as arrangements for sharing of profits, how decisions are to be made for the running of the partnership business and what happens when one of the partners dies or retires from the business for any reason.

Partners are personally liable for debts of the firm and the liability of each partner is unlimited so that creditors can recover their entire debt from one partner. Every partner is an agent of the others and may, on behalf of the partnership, enter contracts, incur debts and dispose of partnership property in the ordinary course of the partnership business.

Save for partnerships of more than twenty individuals all business letters and certain other documents must show the names of all the partners in the firm and provide a business address for service. Accounts can be prepared in a simple form with no specific accounting, auditing or disclosure requirements.

Limited Liability Partnership (LLP)

An LLP can be incorporated by “two or more persons associated with carrying on a lawful business with a view to profit”.

It is, like a limited company, but unlike a partnership, a separate legal entity and may enter into contracts and hold property in its own right. Assets, profits and liabilities all belong to the LLP. The members of an LLP are treated, for tax purposes, like a partnership.

Members are taxed individually and the assets of the LLP are treated as owned by the members.

The name of the LLP cannot be registered if a similar name already exists on the company’s index or the LLP names index. The name of the LLP must end with the words LLP and must appear on any business stationery along with the registered office, registered number and place of registration.

There must be at least two members of an LLP at all times failing which the limited liability is lost. There is no upper limit on the number of members.

The relationship between members is governed by express agreement, or by the provisions of the Partnership Act (and members act as agents of the LLP).

Members of an LLP have no contractual liability to the creditors of the business and are protected beyond their capital commitment save in certain circumstances similar to those as with a limited company. An annual return must be filed with audited accounts.

PREMISES

Home based?

It may be possible to run a small business from your home. This can, however, create the following difficulties :-

• There may be restrictive covenants registered against the title to your property preventing you running a trade or business from your home.
• Planning permission may be required for trading from your home as it may amount to a change of use for planning purposes.
• The mortgage on your property may restrict the use of your home for business purposes.
• Although you may be able to claim a proportion of outgoings as a business expense for tax purposes there are likely to be capital gains tax implications when you sell the property.
• Your neighbours may not be impressed with your running a business in a residential area.

Renting Property

Relatively few businesses will be capable of being run from home. Most will require commercial premises from which to trade. In some circumstances small “serviced accommodation” often providing other services (e.g. fax, secretarial services, reception etc) may be available on monthly terms. It may be sensible to have a solicitor consider any documentation provided in such circumstances but no significant expense is likely to be involved.

For many small businesses, however, a formal lease of premises will be necessary. Specialist legal assistance should always be taken as to the meaning and effect of any lease being taken. For example provisions will likely exist dealing with :-

• Rent
  Most leases will contain a rent review clause (a provision allowing the landlord to increase the rent at fixed intervals) which may not only affect cash flow but also the ability to sell on the lease to somebody else. A rent free period at commencement of the lease may be negotiated although the effect on rent review will need due consideration. Provision will be required for suspension of rent payments if the premises become unfit for use.
• Dilapidations
  You should be aware of your responsibilities to the landlord with regard to the condition of the premises. You will need expert advice as a tenant may be required to put the premises in a better condition than they were at the start of the lease unless appropriate clauses are inserted in the lease at the outset.
  Length of the lease
  You may, with expert assistance, be able to negotiate the length for which the lease is being taken and reduce your potential liabilities. A break clause may be inserted giving you (and possibly the landlord) an option to terminate the lease at specified periods during the life of the lease.
• Guarantees
  You may be required to provide a personal guarantee if the lease is in the name of a limited company. You may then become personally liable for non-payment of rent or breach of other covenants and should seek specialist advice before entering such a guarantee.
• Selling the lease
  You will need to ensure that the lease allows you to dispose of the premises should you wish to do so. Leases will often contain clauses preventing disposal without the landlord’s agreement to the proposed new tenant. A landlord can specify conditions to be fulfilled before consent will be given. As a tenant you may be taking on a considerable liability by renting premises and the importance of seeking appropriate legal advice cannot be over emphasized.

Buying business premises

The purchase of property usually involves a considerable capital expense and may require a mortgage although the business will then own a valuable capital asset.

It is always sensible to instruct a Chartered Surveyor to carry out an inspection of the property before purchase. If defects are found it may assist with the negotiation of a lower price with the seller.

An average property purchase transaction proceeds in stages as follows :-

• Submission of searches
  Your Solicitor will submit searches to the local authority to check whether there are any public works affecting the property or whether any planning restrictions exist. Additional searches and enquiries may be submitted in particular circumstances.
• Title investigation.
  After receiving the contract from the sellers Solicitor the documentation is checked and enquiries submitted. The sellers title will be verified to ensure that he or she is able to sell the property and in order to identify any restrictions or adverse rights affecting it.
• Receipt of mortgage offer.
• Written confirmation of any mortgage advance will be received from the bank or building society.
• Exchange of contracts.
  This takes place after a deposit (usually 10% of the selling price) is paid and each party has signed and exchanged copies of the purchase contract. Once contracts have been exchanged the sale is legally binding. If a buyer fails to complete without justification the seller is entitled to keep the deposit.
• Receipt of mortgage funds.
  The funds are received from the bank or building society to enable the property purchase to be completed.
• Completion.
  The balance of the purchase price is paid and ownership and possession of the property is transferred to the buyer.

After completion stamp duty is paid and the title to the property is registered at the Land Registry in the name of the purchaser.

Following return of the deeds from the Land Registry these are submitted to any mortgage lender for safe keeping.

There are taxation implications involved in the purchase of a property by a company. Full legal advice should be sought as to the implications.

EMPLOYMENT ISSUES

Employment legislation places considerable demands on a small business but a failure to comply may have serious financial implications. It is essential that small businesses are aware of the legal regulations affecting their employees and ignorance of the law will not be a defence. Mistakes can be catastrophic for a small business with Employment Tribunals now able to award over £65,000.00 compensation for unfair dismissal and in cases of proven discrimination awards of compensation are uncapped.

Small employers should be, at least, aware of the following :-

• Taking staff on
  When advertising for staff employers should not show an intention to discriminate unlawfully on the grounds of sex, race, disability, sexual orientation, religion/belief or age. Job descriptions such as “salesman” or “waitress” may indicate an intention to discriminate and non-gender based descriptions such as “sales person” should be used.

  At interview questions about candidates family commitments, marriage plans or intentions to start a family should be avoided as potentially discriminatory.

  Disabled applicants invited for interview should not be discriminated against in arrangements made for the interview to take place.

• Written statement of particulars of employment
  Employers are required to provide employees within two months of commencement of work, with a written statement of particulars of employment. The statement must include :-
• The name of the employer and the employee
• The date when the employment began
• Information about pay, hours of work, holidays, sickness pay, pensions, periods of notice and place of work.
• The disciplinary rules applicable
• The grievance process including the name of a person to whom the employee can apply for the purpose of seeking redress

An employer may wish to provide a more detailed contract of employment imposing additional terms and conditions on the employee which may include, for example :-

• Restricting the behavior of former employees after they leave.
• Keeping trade secrets confidential
• Commission and bonus payment clauses
• Fringe benefits and incentive procedures
• Probationary periods
• Rights during employment
• Paid Holidays
  Four weeks paid holiday is now compulsory under EU Legislation. Holiday pay is paid at the normal rate of pay. No statutory right exists to take bank holidays off.
• Hours of Work
  A maximum average working week of 48 hours over a 17 week period exists unless the “worker” agrees to work longer hours. No exemption exists for small employers. If an employee is to be required to work longer hours a written agreement should be obtained for the worker to opt out of the forty eight hour week. An employee must be able to terminate the opt out agreement on not more than three months notice. The EU is seeking to force the UK to remove the 48 hour week opt out.
• National Minimum Wage
  Two minimum hourly rates of pay exist. For workers between 18 and 21 the current minimum hourly rate is £4.45 pence. For workers aged 21 and over the national minimum rate is £5.35 per hour. No small employer exemption exists. These rates are effective from 1st October 2006.
• Itemised Pay Statement
  All employees are entitled to an itemized pay statement detailing deductions for tax and NIC, tax credit payments and student loan reductions.
• Statutory Sick Pay (SSP)
  An employee absent for four or more consecutive days due to illness or injury is entitled to receive statutory sick pay from his or her employer for a period of up to 28 weeks in any period of sickness. The current rate of SSP is £70.05 per week (tax year 2006/07). Employers are entitled to recover any SSP paid over and above 13% of their monthly NIC liability.
• Stakeholder Pensions Access to a stakeholder pension scheme must be offered by employers with five or more employees unless an exemption exists.
• Maternity rights
  The dismissal of an employee on grounds of pregnancy will be unfair and discriminatory. Maternity rights include time off for ante natal care, maternity leave and most pregnant employees are entitled to statutory maternity pay (SMP). SMP is payable for 26 weeks and at a rate representing 90% of the employees normal earnings for the first six weeks and a set statutory rate of £108.85 per week (or 90% of earnings, whichever is the lower) for the following twenty weeks. A (small employer) with a total gross NIC liability of £45,000.00 or less in the previous year will be reimbursed paid SMP in full together with an extra 4.5% to cover the costs of administering the scheme.
• Parental Leave
  Following employment for at least one year workers with responsibility for a child are entitled to unpaid parental leave. Time off for dependants Reasonable time off to deal with an emergency involving a dependant is available to all workers. Health and Safety Employers are responsible for providing a safe working environment for their employees.
• Equal Opportunities Discrimination on grounds of sex, colour, race, nationality, ethnic or national origin, disability, religion or belief and sexual orientation is unlawful. Employment, training and promotion must be open to all. Part Time Workers Less favourable treatment of part time workers is not allowed in terms of pay, pensions, holidays and training. Trade Union Activities All employees have a right to join or not join a Trade Union.
• Termination of Employment
  A statutory minimum period of notice must be given dependent on the length of an employee’s service. An employee is entitled to one weeks notice for each complete `year of employment up to a maximum of twelve weeks. An employee with one years continuous service is given statutory protection against unfair dismissal. Whether a dismissal is fair or unfair will depend upon the reason for the dismissal and whether the procedure followed by the employer was fair.

  Five potentially fair reasons for dismissal exist:-

• A reason related to the capability or qualifications of the employee
• A reason related to the conduct of the employee
• Redundancy
• That the employee could not continue to work in that position without contravention of a legislative provision
• Some other substantial reason of a kind so as to justify the dismissal.

An employee with a minimum of two years continuous service is entitled to a redundancy payment if his or her job ceases to exist and suitable alternative employment is not available.

RUNNING THE BUSINESS

It is important to have in place carefully considered written contractual terms before starting to trade with customers and suppliers. Terms and conditions of trading need to be brought to the attention of the other party before the contract is entered into or the terms will not be binding. To ensure terms are effective have the other party sign a copy. Check the standard terms and conditions of the other party to ensure there is no confusion as to whose terms and conditions will apply.

Clauses that need to be considered include :-

• Price, date payment is due and method of payment
• Delivery details and non-liability of seller for delay beyond its control
• Seller retaining ownership until goods are paid for but requiring buyer to carry risk for them and to insure them.
• Limitation on sellers liability for some mistakes.
• Provision for interest to be charged on late payment.

It is important to understand some basic principles of contract law :-

• Certain rights are imposed by law e.g. goods must be “fit for the purpose” for which they are sold and be of “suitable quality”.
• Goods must match samples or descriptions in brochures.
• If private consumers are dealt with as customers or clients any standard terms whether in a letter or a printed contract or subject to the European Directive on unfair contract terms and must be “fair” or they will be of no legal effect at all.
• Where an agreement is not kept a breach of contract will occur. A sufficiently serious breach may entitle the innocent party to reject the contract. A non-serious breach may entitle the innocent party to compensation.
• If terms are printed on the back of a document the front should clearly draw attention to the terms on the back.
• Goods or services sold by telephone/mail order/internet are affected by the Consumer Protection (Distance Selling) Regulations 2000 by which consumers must be provided with specific information and given a seven working day cooling off period.

Managing cash flow is the secret to a successful business. Poor cash flow even when trade is buoyant can cause significant difficulties to a small business and in extreme cases force closure.

A carefully planned enforced credit control process is a necessity and might include :-

• Vetting a potential customers credit worthiness before opening an account with them.
• Drawing up written contracts and/or terms and conditions of trading emphasizing when payment is due and providing a penalty for late payment although consideration might also be given to offering discounts for prompt or early payment.
• The Late Payment of Commercial Debts (Interest) Act 1998 allows small businesses to claim late payment interest at 8% above Bank of England base rate.
• Operating a blacklist of customers with an unacceptable payment record unless payment is made in advance. Getting to know and complying with the procedures of your customers invoicing and accounts department.
• Maintaining regular credit cheques on existing customers.
• Ensuring all dispatch notes and invoices are accurate, are delivered to the right customer and sent to the correct address.
• Introducing a “stop” procedure for supplying customers who are late in payment.
• Sending reminders at appropriate stages and following up by phone/fax/email/contact by sales force as necessary.
• Taking legal action by issuing proceedings in the “small claims court” where the disputed sum is under £5,000.00 and/or instructing a Solicitor to recover the amount outstanding on your behalf. A Solicitors letter in the first instance, in any event, should always be considered before the issue of court proceedings.

Protecting business products and ideas

In the course of your business you may develop or design original products processes marks and ideas which others may subsequently seek to copy. A range of possibilities exist for protecting the businesses rights :-

• Copyright
  Copyright is used to protect, for example, written musical and artistic work such as sound recordings, films and drawings and computer programmes. Copyright arises automatically giving the right to control the use of the work protected and to prevent it being copied.
• Patents
  A patent may be registerable to protect a unique technical process which has not previously been available. Great care must be taken to ensure that details of the process are not disclosed before a patent is registered. A formal patent registration process exists which can be expensive and takes time.
• Trademarks
  A distinguishing mark may be registered as a trademark (e.g. a logo or slogan) which confers exclusive rights for the business to use the mark for the business’s goods or services.
• Confidentiality
  It may be sensible for a business to enter into a confidentiality agreement with any person or business to whom a business idea is to be disclosed.

DISPUTE RESOLUTION

Running a business can be a minefield. Disputes do arise and Hodge Halsall provide a range of services designed to assist with dispute resolution for all aspects of the small business. Disputes may arise about :-

• Contracts
• Debts
• Professional negligence
• Patents, copyright and trademarks
• Partnerships
• Quality of goods and services
• Property
• Loans, guarantees and securities
• Employment issues
• Regulatory and tax investigations
• Actions against directors
• Property/landlord and tenant disputes
• Breach of contract
• Partnership and shareholder disputes
• Employment Insolvency and director disqualification
• Professional negligence claims

Resolving a dispute before Court or tribunal should always be seen as a priority. Litigating involves money and time and the losing party will often be ordered to pay the otherside’s legal costs and expenses. The Judicial system should be used only where all else fails.

When pursuing a claim a carefully worded and accurate demand letter should always be sent before issuing court proceedings. Any attempt to compromise a claim either verbally or by letter should be clearly stated to be “without prejudice”.

Hodge Halsall adopts a proactive, commercial and cost effective approach to the resolution of all disputes seeking to avoid, where possible, the need for determination by a Court. The approach of Hodge Halsall is to resolve business disputes in a manner which is appropriate, economic and speedy.

We seek to defend and retain the rights of our clients and protect or recover their assets. Every effort is made to provide businesses with reliable advice upon the prospects of success of any anticipated action and upon the most suitable dispute resolution process available. Our aim is a rapid and committed defence of your business interests tempered by a consideration of the wider picture.

Please contact us for further information.