Frequently Asked Questions
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.