Corporate & Commercial Solicitor, Jonathan Masucci, looks at new opportunities emerging from the COVID-19 crisis and gives advice to those who may be thinking of starting a new business or venture.
Throughout the COVID-19 pandemic, businesses have faced numerous and unprecedented challenges resulting in changes to the way many of us work. From remote office working and restaurant come takeaway delivery services, to gyms and educational facilities delivering content online via video conferencing platforms, not only has the number of people working from home increased but social distancing measures have also impacted the way we interact with each other and conduct day-to-day business.
These changes do not look like they will be disappearing any time soon but have also created new opportunities for business. For some, lockdown may have brought about the realisation that too much time was spent commuting to and from their place of work, when they have specific skills and knowledge that can be put to equally effective use from home. For others who have been furloughed or made redundant, now may seem like a good time to start a new business endeavour they have always been passionate about.
As a result, you may have found yourself in a position where you are considering whether or not now might be a good time to start up your own business. If so, then there are some important steps to consider, before deciding how to proceed.
Do your research
It is important to remember that starting a business during these challenging times is no different to starting a business at any other time.
Whilst you may have the reassurance of friends and family that they think your idea will succeed, researching the area of business you are considering going into, together with the start up costs and finances (which could be minimal depending on whether or not you will be operating from home), who your customer is and how you will deliver your goods and services to them, is vital to the long term success of your business.
To that end, writing up a business plan is not only important but will be useful in focusing your mind on what areas you need to research further. A business plan will require you to research areas such as your customers, the market for your goods/services, marketing, finances and profit margins, which will all assist in helping you to decide whether or not starting up your own business is a viable option.
If your start up business requires financial assistance, you may also need to provide your business plan to a lender for their consideration. It goes without saying that having a well formulated business plan, is far more likely to convince a lender to provide your business with the necessary start up funding.
Setting up a business
There are various forms of business structure in which you may choose to operate. Each offers a number of advantages and disadvantages depending on how you wish to operate your business. It is also important to seek accountancy advice at an early stage, with regards to the most tax efficient way to structure your business.
In brief, the main types of business structure are as follows: -
A sole trader is someone who is in business on their own as a self-employed person. They may have employees but essentially, they are the person running the business. Although it is more straightforward to set up as a sole trader, the main drawback is that a sole trader is personally liable for all the debts of the business. As a result, if the business goes badly, the sole trader could face the possibility of being declared bankrupt, together with losing their savings, house and other possessions.
In short, a partnership is where two or more individuals are in business together and divide the profits and losses of the business between them. An advantage of forming a partnership is that there are fewer formalities, resulting in there being less expense and more operational privacy than is the case when setting up a company. That said, a key disadvantage of a partnership is unlimited liability for the debts of the partnership. This applies jointly and severally and as a result, a partner could face bankruptcy and risk losing their savings, house and possessions because the other partners are unable to pay the debts of the business.
A business which is run as a limited company will be owned and operated by the company itself. The company will be recognised in law as having an existence which is separate from the individual or individuals that formed the company and from its directors and shareholders. As a result, the main advantage of forming a limited company is the limited liability it generally affords its directors and shareholders (at least when they are acting honestly and in accordance with their duties as a director). That said, if your business requires financing, a lender will often require a personal guarantee from a director so if the company fails to make repayments, the director can be held personally liable.
The increased formality in setting up a company is a downside (although the level of formality is somewhat less for smaller companies). The division of powers between board meetings (where decisions of the directors are generally made) and general meetings (where decisions of the shareholders are generally made) is a fundamental aspect of a company. It imposes a level of formality that is not required when running a business as a sole trader or a partnership. Whilst, in practice, an individual may hold the position of both director and shareholder, so that it may seem pointless to make a distinction between these roles, nevertheless, this distinction must be observed since the validity of decision making may be in question if the appropriate formality has not been observed.
Rules, regulations and responsibilities
The various rules and regulations that apply to your particular business will vary depending on the nature of your business, where you operate from and whether you will be taking on help in the form of employees, agency workers etc. As a starting point, you should consider the following areas in particular:
- any licences and permits that your business may require
- types of insurance your business will require (i.e. business insurance, professional indemnity insurance, employers’ liability insurance etc.)
- the rules and regulations that apply if you are selling goods online, buying and/or selling goods abroad or dealing with the storage and use of personal information
- if you take on agency workers or freelancers you will have responsibilities towards, for example, their health and safety; and
- for those that decide to take on employees, there will also be additional responsibilities as an employer including running payroll, paying employees’ National Insurance and providing workplace pensions to eligible staff.
Where to run your business
If you decide to run your business from home you may also need permissions or separate insurance to run the business, together with checking if you have to pay business rates. Conversely, if you rent or buy a property to operate your business from, you may have to pay business rates although small businesses can apply for a discount on business rates and some may pay nothing.
Although, in the early stages of setting up a business, you are likely to be more concerned with the practical and operational side, it is equally important to consider the legal side. For instance, failing to consider payment terms and customer cancellation rights could result in time, focus and resources being diverted away from increasing the profitability of your business. Drawing up terms and conditions to protect both you and your customers from potential disputes should assist in reducing the amount of time spent in dealing with such issues. In addition to this, you should consider protecting any relevant forms of intellectual property such as patents, trademarks and design rights.
Depending on the type of business structure you decide on, the following documents can also assist in establishing the relationship between your business partners.
If you decide to go into business as a partnership, although not required by law, it is sensible to enter into a Partnership Agreement, otherwise the Partnership Act 1890 will govern the partnership and may not be flexible enough to adequately regulate your business. In short, a Partnership Agreement is a contract between the partners which can be used to set out their duties and obligations in connection with the business, including:
- how long the partnership will be for
- how percentages of ownership and distribution of profits and losses are to be split
- the management powers and duties of each partner; and
- how the partnership can be brought to an end.
In much the same way as a Partnership Agreement regulates the relationship between partners, if you decide to incorporate as a limited company with multiple individuals, a Shareholders’ Agreement will be useful in regulating the way in which business is conducted. In addition to this, a Shareholders’ Agreement is also typically used to address important matters such as:
- the management of the company
- the ownership and transfer of shares
- dividend policies; and
- the protection of majority and minority shareholders.
Brave New World
There will inevitably be many factors to consider when deciding whether or not to start your own business, especially during this time of unprecedented uncertainty and change. As ever, it is vitally important to ensure the foundations for your business venture are correctly laid down, in order to ensure it is best placed to withstand the challenges and take advantage of the opportunities that lie ahead.
For further advice on setting up a new business and other Corporate & Commercial issues, please contact Jonathan Masucci.