Even before you start selling your wares there are a number of important decisions to make. You have a range of ownership options that could be worth exploring even if you are going to own the business outright with no one else involved.
You may also have valuable assets such as inventions or designs that you are bringing into the business or other valuable pieces of business property such as a domain or business name that you wish to register or protect once your business gets started.
Deciding on ownership
Before you start trading you will need to consider what legal form your business will take. There are four main forms that a business can take, and the one you choose will depend on a number of factors: commercial needs, financial risk and your tax position.
Each of these forms is explained briefly below, together with the procedure to follow on setting it up. You can change your ownership status later as your circumstances change, so whilst this is an important decision it is not a final one.
Sole trader
Over 80 per cent of businesses start up as sole traders, and indeed around 55 per cent of all businesses employing fewer than 50 people still use this legal structure. It has the merit of being relatively formality free and, unless you intend to register for VAT, there are few rules about the records you have to keep. There is no requirement for your accounts to be audited or for financial information on your business to be filed at Companies House.
For a sole trader there is no legal distinction between you and your business – your business is one of your assets, just as your house or car is. It follows from this that, if your business should fail, your creditors have a right not only to the assets of the business but also to your personal assets, subject only to the provisions of the Bankruptcy Acts (these allow you to keep only a few absolutely basic essentials for yourself and your family).
The capital to get the business going must come from you – or from loans.
There is no access to equity capital, which has the attraction of being risk- free. In return for these drawbacks you can have the pleasure of being your own boss immediately, subject only to declaring your profits on your tax return.
Partnership
Partnerships are effectively collections of sole traders and, as such, share the legal problems attached to personal liability. There are very few restrictions to setting up in business with another person (or persons) in partnership, and several definite advantages. By pooling resources you may have more capital;
you will be bringing, hopefully, several sets of skills to the business; and if you are ill the business can still carry on.
There are two serious drawbacks that you should certainly consider. First, if your partner makes a business mistake, perhaps by signing a disastrous contract without your knowledge or consent, every member of the partnership must shoulder the consequences. Second, if your partner goes bankrupt in his or her personal capacity, for whatever reason, his or her share of the partnership can be seized by creditors. As a private individual you are not liable for your partner’s private debts, but having to buy him or her out of the partnership at short notice could put you and the business in financial jeopardy.
The legal regulations governing this field are set out in the Partnership Act 1890, which in essence assumes that competent businesspeople should know what they are doing. The Act merely provides a framework of agreement
that applies ‘in the absence of agreement to the contrary’. It follows from this that many partnerships are entered into without legal formalities – and sometimes without the parties themselves being aware that they have entered a partnership!
The main provisions of the Partnership Act state:
All partners contribute capital equally.
All partners share profits and losses equally.
No partner shall have interest paid on his capital.
No partner shall be paid a salary.
All partners have an equal say in the management of the business.
It is unlikely that all these provisions will suit you, so you would be well advised to get a ‘partnership agreement’ drawn up in writing by a solicitor at the outset of your venture.
Limited partnership
One possibility that can reduce the more painful consequences of entering a partnership as a ‘sleeping partner’ is to have your involvement registered as a limited partnership. It means you (or your partner) can play no active part in running the business, but your risks are limited to the capital that you put in.
Unless you are a member of certain professions (eg law, accountancy, etc) you are restricted to a maximum of 20 partners in any partnership.
Limited company
Out of the 4.5 million businesses trading in the UK, over 1.4 million are limited companies. As the name suggests, in this form of business your liability is limited to the amount you state that you will contribute by way of share capital (though you may not actually have to put that money in!).
A limited company has a legal identity of its own, separate from that of the people who own or run it. This means that, in the event of failure, creditors’
claims are restricted to the assets of the company. The shareholders of the business are not liable as individuals for the business debts beyond the paid- up value of their shares. This applies even if the shareholders are working directors, unless of course the company has been trading fraudulently. (In
practice, the ability to limit liability is severely restricted these days as most lenders, including the banks, often insist on personal guarantees from the directors – see Chapter 10 for more on this subject.) Other advantages include the freedom to raise capital by selling shares.
Disadvantages include the cost involved in setting up the company and the legal requirement in some cases for the company’s accounts to be audited by a chartered or certified accountant. Usually it is only businesses with assets approaching £3 million that have to be audited but if, for example, you have shareholders who own more than 10 per cent of your firm they can ask for the accounts to be audited. You can find out the latest information on auditing small firms either from your accountant or on the Business Link website (www.businesslink.gov.uk > Taxes, returns and payroll > Introduction to business taxes > Accounting and audit exemptions for small companies).
The company can be bought ‘off the shelf’ from a registration agent and then adapted to suit your own purposes. This will involve changing the name, shareholders and articles of association, and will cost about £250 and take a couple of weeks to arrange. Alternatively, you can form your own company, using your solicitor or accountant. This will cost around £500 and take six to eight weeks.
The behaviour of companies and their directors is governed by the various Companies Acts that have come into effect since 1844, the latest of which came into effect in November 2006.
Cooperative
A cooperative is an enterprise owned and controlled by the people working in it. Once in danger of becoming extinct, the workers’ cooperative is enjoying something of a comeback, and there are over 4,370 operating in the UK, employing 195,000 people. They are growing at the rate of 20 per cent per annum.
Help and advice on business ownership matters
A Guidance Note entitled ‘Business ownership’ is available from Com- panies House (www.companieshouse.gov.uk > Guidance Booklets).
Business Link (www.businesslink.gov.uk > Taxes, returns and payroll >
Choosing and setting up a legal structure > Legal structure: the basics) has a guide to putting your business on a proper legal footing, explain- ing the tax and other implications of different ownership structures.
Co-operatives UK (www.cooperatives-uk.coop > Services > Co- operative Development) is the central membership organisation for cooperative enterprises throughout the UK. This link is to the regional network.
Desktop Lawyer (www.desktoplawyer.co.uk > Business > Business Start-up > Choosing a business structure > The partnership) has a summary of the pros and cons of partnerships, as well as inexpensive partnership deeds.
Naming your venture
Your business name is almost always the first way people get to hear about your venture, and it should convey quickly and clearly what you do. Once you have to start explaining what you do the job of communicating gets harder.
As you are going to have to put some effort into creating this name and that of your web presence (domain name) if you plan to have one, it makes good sense to take some steps to protect your investment.
Business names
Your company name can, in effect, be the starting and sustaining point in differentiating you from your competitors and, as such, should be carefully chosen, be protected by trademarks where possible (see page 62) and be written in a distinctive way. It follows therefore that the main consideration in choosing a business name is its commercial usefulness.
When you choose a business name, you are also choosing an identity, so it should reflect:
who you are;
what you do;
how you do it.
Given all the marketing investment you will make in your company name, you should check with a trademark agent whether you can protect your chosen name (you are not normally allowed to do so for descriptive words, surnames and place names except after long use).
Second, all businesses that intend to trade under names other than those of their owner(s) must state who does own the business and how the owner
can be contacted. So, if you are a sole trader or partnership and you only use surnames with or without forenames or initials, you are not affected.
Companies are also not affected if they simply use their full corporate name.
If any name other than the ‘true’ name is to be used, then you must disclose the name of the owner(s) and an address in the UK to which business documents can be sent. This information has to be shown on all business letters, orders for goods and services, invoices and receipts, and statements and demands for business debts. Also, a copy has to be displayed prominently on all business premises. If you are setting up as a limited company you will have to submit your choice of name to the Companies Registration Office along with the other documents required for registration. It will be accepted unless there is another company with that name on the register or the Registrar considers the name to be obscene, offensive or illegal.
Changing your name
It’s not the end of the world if you decide after a year or so that your business name is not quite right, but you will have largely wasted any earlier marketing effort in building up awareness.
A good name, in effect, can become a one- or two-word summary of your marketing strategy; Body Shop, Toys R Us and Kwik-Fit Exhausts are good examples. Many companies add a slogan to explain to customers and employees alike ‘how they do it’.
Cobra Beer’s slogan ‘Unusual thing, excellence’ focuses attention on quality and distinctiveness. The name, slogan and logo combine to be the most visible tip of the iceberg in your corporate communications effort.
Spending time initially on trying to get your name and slogan right could pay off in the long term.
Registering domains
If you plan to have an internet presence you will need a domain name, that is a name by which your business is known on the internet that lets people find you by entering your name into their browser address box. Ideally you want a domain name that captures the essence of your business neatly so that you will come up readily on search engines and is as close as possible to your business name.
If your business name is registered as a trademark (see page 62) you may (as current case law develops) be able to prevent another business from using it as a domain name on the internet.
Registering a domain name is simple, but as hundreds of domain names are registered every day and you must choose a name that has not already been registered you need to have a selection of domain names to hand in case your first choice is unavailable. These need only be slight variations, for example Cobra Beer could have been listed as Cobra-Beer, CobraBeer or even Cobra Indian Beer, if the original name had not been available. These would all have been more or less equally effective in terms of search engine visibility.
Once you have decided on a selection of domain names, your internet service provider (ISP), the organisation that you use to link your computer to the internet, can submit a domain name application on your behalf.
Alternatively you can:
Use Nominet UK (www.nic.uk), the registry for British internet do- main names, where you will find a list of members who can help you register, though you can do so yourself if you are ‘web aware’.
If you want to operate internationally, for example by using a ‘.com’
suffix or a country-specific domain, check out with one of the world directories of internet domain registries such as www.internic.net and www.norid.no/domreg.html.
Use a website such as Own This Domain (www.ownthisdomain.co.uk) or 123 Domain Names (www.123domainnames.co.uk), which provide an online domain name registration service, usually with a search facil- ity so you can see if your selected name has already been registered.
Obtain free domain names along with free web space by registering with an internet community. These organisations offer you web pages within their community space as well as a free domain name, but most communities only offer free domain names that have their own com- munity domain tagged on the end – this can make your domain name rather long and hard to remember.
Help and advice on names and their registration
A Guidance Note entitled ‘Choosing a company name’ is available from Companies House (www.companieshouse.gov.uk > Guidance Booklets).
Companies such as Altaire (www.altaire.com/domains/index.html) and Electric Names (www.electricnames.co.uk) have detailed domain name registration on their websites, as well as offering a same-day registration service for prices between £10 and £25 per annum.
Business Link (www.businesslink.gov.uk > IT & e-commerce > E- commerce > Web hosting options) has comprehensive, up-to-date information on choosing a domain name and registering and protecting that name.
Intellectual property matters
Aside from deciding on an ownership structure, a further legal issue to tackle is ensuring that you have ownership of any intellectual property (IP) that is central to your business. Even if your business is not highly technical or stashed full of innovations, if your logo, your slogan or the design of your product is part of the uniqueness that differentiates you from others in the market you will want to make sure some newcomer can’t step in and purloin your valuable asset.
When Mark Zuckerberg, then aged 20, started Facebook from his college dorm back in 2004 with two fellow students, he could hardly have been aware of how the business would pan out. Facebook is a social networking website on which users have to put their real names and e-mail addresses in order to register; then they can contact current and past friends and colleagues to swap photos, news and gossip. Within three years the company was on track to make $100 million sales, partly on the back of a big order from Microsoft, which appears to have its sights on Facebook as either a partner or an acquisition target.
Zuckerberg, in jeans, Adidas sandals and a fleece, looks a bit like a latter-day Steve Jobs, Apple’s founder. He also shares something else in common with Jobs. He has a gigantic intellectual property legal dispute on his hands. For three years he has been dealing with a lawsuit brought by three fellow Harvard students who claim, in effect, that he stole the Facebook concept from them.
You should investigate the four categories of protection: patenting, which protects ‘how something works’; copyright, which protects ‘work on paper, film and DVD’; design registration, which protects ‘how something looks’;
and trademark registration, which protects ‘what something’s called’.
They all have one thing in common, though: in the event of any infringement your only redress is through the courts, and going to law can take time and money, whether you win or lose, so you should consider insuring against such eventualities.
Patents
A patent can be regarded as a contract between an inventor and the state.
The state agrees with the inventor that if he or she is prepared to publish details of the invention in a set form and if it appears that he or she has made a real advance, the state will then grant the inventor a ‘monopoly’ on the invention for 20 years: ‘protection in return for disclosure’. The inventor uses the monopoly period to manufacture and sell his or her innovation;
competitors can read the published specifications and glean ideas for their research, or they can approach the inventor and offer to help to develop the idea under licence.
However, the granting of a patent doesn’t mean the proprietor is auto- matically free to make, use or sell the invention him- or herself, since to do so might involve infringing an earlier patent that has not yet expired.
A patent really only allows the inventor to stop another person using the particular device that forms the subject of the patent. The state does not guarantee validity of a patent either, so it is not uncommon for patents to be challenged through the courts.
What you can patent
What inventions can you patent? The basic rules are that an invention must be new, must involve an inventive step and must be capable of industrial exploitation.
You can’t patent scientific or mathematical theories or mental processes, computer programs or ideas that might encourage offensive, immoral or anti- social behaviour. New medicines are patentable but not medical methods of treatment. Neither can you have just rediscovered a long-forgotten idea (knowingly or unknowingly).
If you want to apply for a patent, it is essential not to disclose your idea in non- confidential circumstances. If you do, your invention is already ‘published’
in the eyes of the law, and this could well invalidate your application.
Stages in the patent process
There are two distinct stages in the patenting process: from filing an application up to publication of the patent; and from publication to grant of the patent.
Two fees are payable for the first part of the process and a further fee for the second part. The whole process takes some two and a half years. Forms and details of how to patent are available free from the Patent Office.
Alternatives to using the patent yourself
What can you do with your inspired invention if you don’t have the resources, skill, time or inclination to produce it yourself? You can take one of three courses once the idea is patented:
1. Outright sale. You can sell the rights and title of your patent to an individual or company. The payment you ask should be based on a sound evaluation of the market.
2. Sale and royalty. You can enter into an agreement whereby you assign the title and rights to produce to another party for cash but under which you get a royalty on each unit sold.
Anthony Robinson, the inventor of Holomedia, a novel holo- gram display system, decided while on a Cranfield enterprise programme not to make and market his product himself.
Instead, he sold the patented product to a large, established company in a complementary field for a substantial six-figure sum, a £20,000 per annum retainer and continuing royalties.
His business could then continue to be run from his home, concentrating exclusively on developing innovative products for other companies to make and sell.