By Tom Dugdale and Claire Martin, McGuireWoods London LLP
In such tough economic times, the task of starting up your own business or considering expanding your business to the UK appears more challenging than ever. However, The Economist* recently ranked the UK as having the 11th best business environment worldwide, placing it ahead of many other European countries, so for those companies with strong balance sheets and those individuals with sufficient start-up capital, setting up in the UK may still make business sense.
If you intend to engage in commercial activity in the UK, there are a few matters you will need to consider from a legal point of view.
Legal Structure – getting the right fit
Choosing the right legal structure is one of the first and most important matters you will need to consider. Your choice will depend on a number of factors, such as the size and nature of your business, general tax considerations, the extent to which you are willing to be exposed to personal liability and the level of public disclosure of your business records.
Individuals who wish to start a business generally operate as sole traders or through limited companies.
Being a sole trader is probably the simplest way to start a business. You can start trading immediately but you will need to notify the tax authorities in the UK (HMRC) of your self-employed status within 3 months of trading. If you intend to work in the UK whilst having tax liabilities or filing obligations in another country you will need to take specialist tax advice.
Whatever structure you adopt you should bear in mind that you may need to obtain authority from certain regulatory bodies and/or take out industry-specific insurance depending on the type of business you intend to operate and you should remember that UK regulatory requirements may differ from those of other jurisdictions.
Alternatively you can set up a private limited company. If you supply goods and services, this is likely to be the most acceptable structure to your customers and suppliers. A private limited company can be set up, owned and operated by just one individual (acting as both shareholder and director). Setting up a company in the UK is quick and straightforward and can be done with as little capital as £1.
A shareholder of a company bears no personal liability for the company’s debts. His liability to the company is limited to the amount payable on shares he holds which have not been fully paid for.
A company director, on the other hand, is exposed to potentially higher levels of personal liability. Directors have specific duties imposed on them, which have recently been enshrined in the Companies Act 2006. Anyone thinking of becoming a director should be fully aware of these duties as breaches can lead to both civil and criminal liability. One duty of particular relevance in this economic climate is that owed to a company’s creditors. If a director allows a company to continue trading when he should have known there was no reasonable prospect of it avoiding insolvency, he could become liable to contribute to the assets of the company on liquidation. There is obviously a fine line to be drawn as to when a director should stop trading and it is therefore important for him to seek accounting and legal advice as soon as his company gets into financial difficulty.
Teaming up with others
By setting up with others you can share potential liability and pool resources. However, there are also risks involved which you will need to consider carefully.
A private limited company is one option and the points discussed above will also apply to companies with multiple shareholders and directors.
A partnership is another option. In fact, anyone who carries on a profit-making business with at least one other person may, in law, already be trading as a partnership without realising it. A partnership is not a separate legal entity and each partner is personally liable for all its debts. Neither a partnership nor its partners are required publicly to disclose their accounts (unlike companies) and so it is possible to keep the financial affairs of a partnership fairly confidential.
Limited liability partnerships (LLPs) were created in 2001 in a bid to limit partners’ personal exposure. An LLP is a separate legal entity and provides that you are only liable up to the amount of capital you have put into the business. The annual accounts of an LLP are filed at Companies House and are a matter of public record.
Just as important as deciding which structure to adopt is to think through your working relationship with your business partners (whether partners in a partnership or fellow shareholders) and establishing how the business will be run. Make sure your relationship is recorded in writing to avoid any future problems especially if your respective levels of involvement (in terms of time and financial contribution) are unequal. Entering into a partnership agreement or a shareholders’ agreement (as the case may be) is strongly advisable. It is common at the beginning of any blossoming business relationship that people fail to consider the implications of falling out with each other and therefore do not have their relationship properly documented. However, the reality is that business relationships often do turn sour and so it is imperative there is legal documentation in place at the outset to protect all parties involved.
Looking to expand into the UK market?
Aside from the option of incorporating a wholly owned subsidiary in the UK, an overseas company may register itself in the UK to operate as a branch. A branch operates under the authority of the company’s headquarters and is not itself a separate legal entity. In the event of financial difficulties the overseas company has unlimited liability for the debts of its branch office.
Alternatively you could seek a joint partner and set up a joint venture (JV) with them. This could be an option if a foreign company wants to enter the UK market but has limited knowledge of it and so teams up with a UK business with local expertise. JVs can either be contractual in nature or take the form of shareholdings in a JV company. Otherwise, acquiring an existing UK business (with its current management) may also be a viable solution which would surmount the problem of having limited local knowledge of the UK market.
Seeking financial and legal advice early, particularly in relation to the tax treatment of the business structure to be chosen, is key and will then enable you to focus your resources on researching your potential market and preparing the financials. You can change your legal structure should your business circumstances change but this may be expensive to achieve.
In this global recession the UK business environment is evolving rapidly. One recent major change came in the Chancellor’s 2009 budget in March. Although corporation tax rates remain unaltered, the top rate of individual income tax is increasing from 40% to 50% (from April 2010) for anyone earning over £150,000 per annum. This will obviously have a direct effect on all high earning sole traders and partners. Company directors who are shareholders may be able to mitigate the impact of this, subject to anti-avoidance rules, by taking out more money by way of dividend instead of salary. This will not be the last major change, so be prepared to adapt your business plan as best you can.
*This ranking is taken from the 2009 edition of The Economist‘s “Pocket World in Figures”.