There’s a lot to learn when you run a business for the first time. These are just a few of the key issues you need to think through.
Name of organisation
There are some restrictions on what you can call your business. The law that used to govern the use of business names is the Business Names Act of 1985 but this was repealed in October 2008. The law currently applies to:
- a company which trades under a name that is not its corporate name;
- a partnership which does not trade under the names of all the partners;
- an individual who trades under a name other than that person’s surname, with or without his or her first names or initials.
If you trade under your own name, e.g. John Smith trading as J Smith, you are not covered by the provisions of the Act, but if you add any words other than your initials or forenames, e.g. John Smith trading as Smith’s Autos, you are covered.
If the Act applies to you (see above), you must comply with all the disclosure requirements. You will need to disclose (as appropriate):
- the corporate name;
- the name of each partner, or
- the individual’s name, and
- in relation to each person named, an address in Great Britain at which documents can be served.
You must display the information in a prominent position so that it can be read easily, in all the places where you carry out your business and where you deal with customers or suppliers.
When The Business Names Act of 1985 is repealed, the requirements will apply only to individuals and partnerships.
You must also ensure that the name of your business is not similar to another’s, as this risks a claim being made against you for “passing off” (a damages claim for the business equivalent of identity theft). It may also be a breach of trademark if another company has registered that name-again, a breach risks a damages claim.
Type of organisation
There are 3 ways in which a business can exist as a legal entity: a company, a partnership or as a sole trader. Each has benefits and disadvantages.
The major advantage of a company is limited liability (hence the name “limited company”). This means that the directors and shareholders are not liable for the debts of the company even if it becomes insolvent, except in certain unusual circumstances. The disadvantage is that a company is more expensive to set up and administer as it is necessary to file company returns and so on, and accountancy costs are higher as the company may be liable to pay tax as well as the directors and shareholders. A company requires at least one director and shareholder as well as a company secretary. Companies are also extremely flexible; Investment into a company is relatively simple for instance. There are many options available, such as share purchase, directors’ loans, and mortgages of property or other assets. There are also many options for the security that the company or its directors can give for investments. There are also many options to realise the value of a company-sale of the business only as a going concern (ie an asset sale), or a sale of all of or part only of the shares for instance. Companies are regulated by the various Companies Acts, which provide a detailed set of rules as to how a company must operate.
If two or more people are in business together with a view to making a profit, this is a partnership. It therefore arises much more frequently than people realise. Unless there is a separate agreement between the partners, the rules that govern a partnership are set out in the Partnership Act 1890. This act provides a template of the agreement that will be imposed on the partnership which may not reflect the terms that the partners actually want, so it is always a good idea to have a proper written agreement prepared. For instance, the act requires that both partners will share the profits and losses. If one party has contributed all of the funds and does all the work and the other is a sleeping partner, this may not be fair or agreed. However irrespective of any agreement the partners may come to between themselves, it is always the case that all partners are jointly and severally liable for the partnership’s debts. This means that any of the partners can be pursued for the whole debt, not just part of it. Again the partnership is liable to pay tax potentially as well as the partners themselves, and there are complex provisions that apply when a partner leaves or joins. It is also possible to form a limited liability partnership in some circumstances, which attempts to provide some of the protection from personal liability to partners.
This arises when an individual goes into business for and by him or herself. It does have the virtue of simplicity (taxation and paperwork generally is straightforward) but third party investment can be complicated without creating a partnership by mistake. It also means that the individual is personally liable for the business’s debts.
This is required to be stated on all company documents together with the company number. Any documents that are served on the company (such as court proceedings) must be served at the registered office; it is frequently the address of the company’s accountants but this can lead to serious delays in mail being forwarded to the company itself, by which time judgment may have been obtained against the company.
On 1st January 2007, new legislation applied new rules to business stationery.
A company must now state its name in legible lettering on the following business stationery, whether in hard copy, electronic or other form:
- All the company’s business letters or order forms.
- All its notices and other official publications.
- All bills of exchange, promissory notes, endorsements, cheques and orders for money or goods purporting to be signed by, or on behalf of, the company.
- All its bills of parcels, invoices, receipts and letters of credit.
- All its websites.
You will need to show, in legible lettering, on all business letters, order forms and any of the company’s websites :
- your place of registration;
- your registered number;
- your registered office address; and,
- if it is being wound up, that fact.
Whenever an email is used where its paper equivalent would be caught by the stationery requirements, the email would also be subject to the same requirements.
The same requirements are also applicable to Limited Liability Partnerships. Companies are required to display additional information on their business documentation.
Any business that trades through advertisements, or online, must also comply with the provisions of the Consumer Protection (Distance Selling) Regulations 2000 (as amended). These Regulations require a supplier to provide a prospective buyer with details about themselves. Before a consumer concludes an online transaction, or responds to an advert, etc, the supplier must provide details of the postal address of their business, so that a consumer may address complaints in a durable written format.
The Electronic Commerce (EC Directive) Regulations 2002 also require a business providing an information society service (which can be the marketing or selling of services to consumers and other businesses, online, by interactive T.V. or by phone texting) to provide the following;
- The full name of the business.
- The geographical address at which the business is established.
- Contact details, including an email address.
- Details of any publicly accessible trade or similar register on which the business is registered. This must include the name of the register, any registration number or other means of identification used in the register.
- If the business is subjected to any authorisation scheme, details of the relevant supervisory authority.
- If the business is a member of a regulated profession, details of the professional body, any professional titles held, details of any other European Member States in which the titles may have been granted, and a reference to the professional rules to which the member is subjected and details of how they can be accessed.
- If the business is VAT registered, the VAT number.
Where the business trades from can be very significant. For instance, if the business is likely to expand rapidly it may be important to reserve the right in employment contracts to require staff to travel to alternative locations. It may also be relevant for the purposes of imposing and enforcing restrictive covenants on employees.
Number of staff
The number of staff employed is relevant as the particular statutory regime that applies (for instance, certain health and safety and employment requirements) are determined by the size of the organisation concerned. Smaller organisations may have less complex requirements to meet, however there are certain minimum standards which all businesses must meet.
Principally annual turnover is relevant for financial purposes, unsurprisingly. Small businesses must meet less stringent reporting requirements in some cases (for instance, small companies are exempted from filing formal audited accounts with Companies House). Eligibility for grant aid is also frequently determined by turnover, amongst other matters.
Organisational documents and disaster recovery
The documentation that applies to any business can be formidable-customer details, financial records, personnel contracts, banking details and so on. If they were destroyed, by a fire for instance, could you get your business up and running again quickly without suffering irrecoverable damage? Its worth taking the time to at least think about the problem, and going some way to protect yourself. Insurance cover can play a part, but what if you can’t find a copy of your policy? Its worth at least taking a copy of these critical documents-for instance, having them scanned onto a CD-ROM-and depositing a copy somewhere secure, perhaps with the bank. If you decide to keep it at home, bear in mind the consequences if it was stolen!
Memorandum and articles of incorporation
These two documents provide the rules that govern a company. The memorandum states what business the company is authorised to undertake, and is now of little relevance. The articles are important however as they deal with how a company deals with meetings of directors and shareholders, who has the casting vote at those meetings and so on. Companies are often bought “off the shelf” with a set of documents using what is known as “Table A”. This is a standard form of articles which works perfectly well in most situations but, like tailored clothes, can be improved on.
As noted above, in the absence of a separate agreement the provisions of the Partnership Act 1890 are implied into a partnership. These are intended to ensure that there is a regulatory framework imposed to cover situations where either no agreement was reached at all, or where a particular issue was not covered by an agreement. Again it is often preferable to have the agreement specifically drafted rather than rely on the Act, as if the agreement was not in writing there is endless scope for dispute as to precisely what was agreed between the partners.
As an extension of the disaster recovery planning mentioned above, it is a useful exercise to consider what key people you need to run your business. Probably the knowledge your transport manager keeps in his head is more critical than the knowledge your finance director has in his, at least when it comes to keeping the business going. Its also worth thinking about what would happen if one of those key people is killed or seriously injured-could you manage?
A director must be appointed by company resolution, and the appointment recorded at Companies House (Companies House records are available for inspection to the public). A partner’s status does not need to be public in the same way, but the joint and several liability implied by a partnership would normally mean that a partner whose name is made public would want his or her partners to be similarly known to the world at large.
Directors are not necessarily employees (but they can be if desired). However it is important to have some form of written agreement between the company and each director, whether in an employment contract or a director’s service agreement, which deals with issues such as restrictive covenants and so on.
Employment contracts are implied by various statutory provisions if they are not in writing. At the very least an employer should provide a written statement of terms, and should also incorporate the statutory grievance and disciplinary procedures that have now been imposed by statute.
A shareholders’ agreement is a document that regulates the relationship that the shareholders in private company have with each other. They often contain provisions that can be invoked to restrict or define the way in which the shareholders can deal with the share’s themselves, for instance to prevent a deadlock situation arising which would otherwise paralyse a company in the event of the shareholders falling out between themselves. They may also regulate the way in which the shares can be disposed of-for instance by requiring that they be offered to the other shareholders at a price determined by a pre-agreed formula.
Commercial agents and contractors
It is often said that commercial agents such as sales agents and sub-contractors have no protection in law against the contracts being terminated-and as a result are “safer” than an employment situation. This is not necessarily so! For instance, under the Commercial Agents Regulations 1993 the termination of an agency agreement can give rise to a substantial claim for lost income by the agent, even if the agency was terminated by the agent’s death.
Trading Documents (including date last reviewed).
These documents can be critical to the success of a business, and can make the difference for example between being able to recover stock sold to a company in receivership but unpaid for, and those goods being sold by the liquidator of the company to satisfy its creditors-including the supplier! Every business should have its own standard terms and conditions of trading drafted to take account of its particular circumstances. Internet-based businesses should take particular care to ensure that its terms and conditions are not only appropriate but are also available on the internet in such a way that they bind anyone using the site.
These documents should be reviewed regularly to take account of changing trading conditions and the changes in the law that emerge periodically.
Terms And Conditions
A well-drafted set of terms and conditions can be critical to your business when things go wrong. See our article for more information.
Is the land occupied by the business an asset and owned by the business? If not, who owns it? This can be critical both for company and individual tax planning, but also for the purposes of insurance. It is particularly complex if the business is a partnership, as land owned by a partnership may be an asset of either the partners as a whole or just one of them. If the latter, this can lead to difficulties when that partner wishes to retire, as the ongoing partners may then be compelled to buy the partners’ interest out. It is also important to appreciate the significance of any charges that may be secured on the land, and any conditions that apply to them.
Details Of Tenancy Including Date Of Expiry And Rent Reviews Often businesses occupying leased property know almost nothing about the rights and obligations that their lease imposes on them. Most people are aware that a business occupying premises for the purpose of the business acquires a right to renew the lease in some circumstances-but those rights can be lost very easily if the strict time limits of part II of the Landlord and Tenant Act 1954 (as amended) are not complied with. In some cases even if it is not possible to renew the lease, compensation can be payable by a landlord if possession is obtained. Leases can also impose stringent repair obligations, which can be enormously expensive to comply with at the termination of a long lease. It is important to understand what those rights and obligations are, and also what time limits apply so that you are not caught out. If you read through the lease of your premises and there is anything that you are not absolutely clear about, get advice on it as soon as possible.
Details of any charges on the land
If the business or its owner owns the land, the bank may have taken a charge over it to secure the borrowing of the business; if it leases the land, the landlord may have charged the freehold for his own purposes. If the loan then falls into arrears, the bank may enforce the loan with potentially serious consequences for you as a tenant. For example, if there is no formal lease in place protecting you, the bank could force you out. There are steps you can take to protect yourself, but you should never operate a business from a site without a proper lease in place.
All businesses are closely regulated in many ways, but some are more regulated than others! It is easy to fall prey to so-called consultants, who are always keen to sell you their advice, but do you really need them? Often the information you need is freely available, you just need to know where to look. If you have any doubts, we are always happy to have a no obligation discussion with you about your concerns.
Disability Discrimination Act compliance
All businesses are potentially affected by the DDA, and need to take account of its effects. See our article The Disability Discrimination Act 1995 – How it affects you for more information.
Businesses use a wide range of property, from cars and vehicles generally to computer equipment. But who actually owns it, and who is responsible for it if it goes wrong or (worse still) is destroyed by fire for example? Of course, all property which is owned by a business should be declared in its accounts as part of its assets; but this may not be the most efficient way for the business to use them. An equipment lease, for instance, can be a more efficient way for a company to operate and use machinery particularly from a tax point of view. Ownership may also be highly relevant to a partnership, for instance if one of the partners brings with them an expensive piece of equipment. It is easy to forget this substantial contribution if the partnership breaks down later. However this can easily be dealt with if the position is analysed carefully at the outset. Ownership may also be relevant for insurance purposes-it is important to ensure that, if the business does not own the property but is responsible for insuring it, the insurer is aware of this.
Much of the value of a business may be the intellectual property it owns, such as its know-how, its trademarks and so on. These intangible but crucial assets must be protected and retained if the business is to thrive. Know-how is particularly difficult to protect as it depends by definition on the staff of the business staying with it. If they leave, the only realistic way the business has of ensuring that valuable information is not transferred to another competing business is by means of restrictive covenants preventing employees disclosing confidential information.
Copyright, designs, patents and trademarks
Certain forms of intellectual property are protected through statute. The Copyright, Designs and Patents Act 1988, is the current UK law and applies to the four strands of intellectual property.
if a design is artistic and is not intended to be mass produced, automatic copyright protection against illegal copying arises. Copyright also protects any drawings or plans of a design.
The Copyright, Designs and Patents Act 1988 is the current UK copyright law (different laws apply internationally). It gives the creators of literary, dramatic, musical and artistic works the right to control the ways in which their material may be used. The rights cover: Broadcast and public performance, copying, adapting, issuing, renting and lending copies to the public. In many cases, the creator will also have the right to be identified as the author and to object to distortions of his work.
Copyright arises when an individual or organisation creates a work, and applies to a work if it is regarded as original, and exhibits a degree of labour, skill or judgement. Interpretation is related to the independent creation rather than the idea behind the creation. Names, titles, short phrases and colours are not generally considered unique or substantial enough to be covered, but a creation, such as a logo, that combines these elements may be.
Normally the individual or collective who authored the work will exclusively own the rights. However, if a work is produced as part of employment then normally the work belongs to the person/company who hired the individual. For freelance or commissioned work, rights will usually belong to the author of the work, unless there is an agreement to the contrary, (i.e. in a contract for service). Only the owner, or his exclusive licensee can bring proceedings in the courts against an infringement. The length of the protection granted varies depending on the type of work.
Design protection covers the outward appearance of a product, including decoration, lines, contours, colours, shape, texture and materials. A new shape or pattern for a product, may be capable of protection as a design.
In the United Kingdom designs are protected by three legal rights;
Registered designs gives the right to stop anyone copying or using a design in the United Kingdom for up to 25 years.
Design right is a free, automatic right that arises on the creation of an original design. It gives the designer the right to stop anyone copying the design for up to 15 years.
A patent protects new inventions and covers how things work, what they do, how they do it, what they are made of and how they are made. It gives the owner the right to prevent others from making, using, importing or selling the invention without permission. An invention must:
- be new
- have an inventive step that is not obvious to someone with knowledge and experience in the subject
- be capable of being made or used in some kind of industry
A patent cannot be a scientific or mathematical discovery, theory or method, a literary, dramatic, musical or artistic work, a way of performing a mental act, playing a game or doing business, the presentation of information, or some computer programs, an animal or plant variety, a method of medical treatment or diagnosis, or against public policy or morality. If an invention meets these requirements, a patent may be applied for. A granted patent must be renewed every year after the 5th year for up to 20 years protection.
Licences And Permissions
These rights can be very valuable in themselves-for instance, a licence to use a specialised manufacturing process or to make a product that uses a registered design a may be granted to a single business in a territory, giving that business a monopoly. Frequently that business would be worthless without that licence. So if you have a licence or permission, you need to be very clear about what that permission does and does not allow you to do, how long it lasts, what obligations are imposed on you and so on. It is particularly important to consider these issues if you are thinking about taking on a franchise, as these agreements are essentially a form of licence. However, often the agreement imposes very little on the business that grants the franchise, and a great deal on the business that takes it on-for instance, there may be tight restrictions on selling the franchise or operating it. It is very important that you take advice before you enter a franchise agreement, rather than afterwards!
Data Protection Licences
The Data Protection Act provides protection for sensitive information about ethnic origins, political opinions, religious beliefs, trade union membership, health, sexual life and any criminal history. The details of the Data Protection Act are quite complex, but at the heart of it are eight common-sense rules known as the Data Protection Principles. These require personal information to be:
- fairly and lawfully processed;
- processed for limited purposes;
- adequate, relevant and not excessive;
- not kept longer than necessary;
- processed in accordance with an individual’s rights;
- kept secure;
- not transferred abroad without adequate protection.
Organisations using personal information (‘data controllers’) must comply with these Principles. The Act, with some exceptions, gives the right to find out what information is held by organisations. This is known as the ‘right of subject access’. On written request, an individual is entitled to be supplied with a copy of all the information an organisation holds.
The organisation may charge a fee for providing the information, up to a maximum of £10 in most instances and up to £50 in the case of manual (i.e. non-electronic) medical records.
The Act is enforced by an independent authority called the Information Commissioner. He has powers to take action against organisations that misuse personal information. All organisations that hold personal data are required to register with the Information Commissioner. This can be done on line, and costs £35 at present.
Businesses are subject to a variety of planning matters dependent on the nature of their operation but essentially all relate to the statutory regulation of the use of land, whether its present use or a future, proposed use. The need to obtain planning permission for an intended use is well-known; what is less well-known is the widespread power that a planning authority has at its disposal if permission is not obtained. This includes the power to require the demolition of a building without planning permission, for instance, without compensation. While it is possible to apply for retrospective permission or to appeal against a refusal, it is inevitably a complex and expensive exercise.
Other licences (Liquor, Waste Licences, etc)
Many business-related licences are granted, administered and monitored by the appropriate Local Authority, and the policy relating to them may well vary between local authorities. An extremely useful resource which is often overlooked is the local authority’s website, which will frequently provide sophisticated information such as access to policy statements, minutes of council meetings, planning applications and so on. Other agencies such as the Environment Agency may also be relevant in granting, monitoring and enforcing licences and their operation.
As with planning permission, the operation and profitability of a business may depend on that business having the appropriate licence to operate, and a breach of the licence can be a very serious matter. A waste disposal company that was in breach of its licence was recently fined over £1.5M by the Court, which represented in the Court’s view the profit it had made from its unlicensed operations.
A successful credit control policy can make the difference between a successful business and one that fails very quickly-it is all too easy to take your eye off the debtor’s list. A key tool is a well-drafted set of terms and conditions, which sets out how quickly a customer must pay and, if appropriate, an effective retention of title clause which will allow you to regain possession of goods delivered to a defaulting customer.
Insurance is a key issue for businesses to consider, and can be a major balance sheet cost. Certain forms of insurance are compulsory; employer’s liability, public liability and motor insurance for example. However, other forms of cover may also be required. For instance, if the business occupies premises (whether or not it owns them) it may also be required to insure against a variety of risks. Some forms of lease require the tenant to insure the fabric of the building for instance, which may require a survey to be undertaken as a condition of the policy to establish its rebuilding cost. In addition if the general public can or may gain access to the premises, even if as a trespasser, public liability cover may be required. Getting advice from a specialist broker is critical.
It is also very important to remember that an insurance policy is one of “utmost good faith”; this means that when completing an application for insurance it is extremely important to disclose all information that may be relevant. If, when a claim is made, the insurer can show that, had it known the full facts it may have considered the risk in a different light, the insurer may be able to repudiate the claim (ie you would not be covered for the risk).
Specialist insurance policies e.g. Key man/Business Interruption/Product liability/Directors’ liability
If you are a director, a partner or a sole trader, you may be personally liable for claims made against your business. You may also be liable in the event that you do not undertake your duties to the company properly, and the business suffers as a result. You can also protect your business against unforeseen events such as the sudden absence of key personnel, or an event that stops your business from functioning temporarily (such as flooding). Your broker will be able to advise you about the various products available.