I want to start a business. What choices do I have regarding the way that I
trade?
Basically, you can trade in your own right as a sole trader in partnership
with others or through the medium of a limited company. Whichever way you choose
there are both advantages and disadvantages. See the In-depth Guide for further
details here.
What is limited liability?
Generally speaking, limited companies have limited liability. This means that
they have their own creditors and debtors and people who run the company are not
liable for the company's debts. In start-up situations however if the company
wishes to obtain credit or borrow money from a finance company or bank or take
premises, then it is likely that the directors will be asked to give personal
guarantees. Apart from this, the company's debts are its own unless the
directors have been trading wrongfully in special situations e.g. where they
should have known or did know that the company was unable to pay its debts.
If I want to form a limited company, what is involved?
You have to lodge with the Companies Registrar a memorandum and articles of
association of the company setting out what its objects are and how it will be
run. You can buy companies "off the shelf" or we can draft the memorandum and
articles for you. There is a fee payable of £20 to the Registrar of Companies
before the company will be registered and a certificate of registration
issued.
If you are trading in partnership with another (which simply means you are in
business together to make a profit) then in the absence of an agreement your
relationship is governed by the Partnership Act 1890. You will have what is
known as a "partnership at will". This means that any partner can terminate the
business on notice at any time.
A partnership agreement will usually give an option to any continuing partner
to acquire the outgoing partner's share and thus preserve continuity in the
business. It will also govern the relationships between the partners and
identify their roles and responsibilities in connection with the business. All
partnerships should have a partnership agreement to prevent very substantial
uncertainty in the longer term.
If I form a company, do my co-founders and I need any other documentation to
govern our relationship with each other?
There are no statutory requirements except that if the founders become
employees of the company then the usual employment considerations apply and
statements of terms and conditions at the very least should be provided to each
individual.
It is however very common for the shareholders in the company to enter into
what is known as a "shareholders agreement". This covers much of the same ground
as a partnership agreement would cover if the business traded through a
partnership. It will set out rights and responsibilities between the
shareholders and perhaps most importantly indicate the terms on which any
outgoing shareholder can sell his or her shares to the remaining shareholders.
In the same way as a partnership agreement prevents uncertainty between
partners, a shareholders agreement can also provide security and is especially
important if you are a minority shareholder in a limited company.
What is joint and several liability and when does it arise?
If you are in business in partnership with others, then each of you have
"joint and several liability" for all of the business debts. This means that
each of you is fully liable up to the full extent of each debt and creditors can
pick and choose amongst you who to enforce it against.
How can I protect my personal assets from my business creditors?
Trading through a limited company will have this effect except in relation to
debts which have been guaranteed or in certain situations where the company is
trading insolvent and you are a director. If there are particular issues however
which you are concerned about then you should take good professional advice.
What will be my duties as a director?
Directors, like partners in a business, have a duty of good faith towards the
company to act in its best interests irrespective of whether or not there are
any employment contracts. Directors also have a number of statutory duties which
if breached, could lead to personal liability for the company's debts. It is a
complex area of the law and if you are concerned about your position, then you
should take professional advice.