legal considerations involved in starting up, managing and winding up the business

Introduction

            Making the decision to start a business is the easy part, but there are a variety of legal considerations involved in starting up, managing and winding up the business. The entrepreneur must also decide on the organizational form that he will adopt for the business. This essay sets out some of the key considerations.

Factors to consider

1.      Organizational form and registration

An entrepreneur needs to think about the organizational form that is most advantageous for his particular business. The most common organizational forms are sole proprietors that are owned and operated by a single owner, partnerships where two or more persons come together to make a profit and limited liability corporations or companies (Miller 2012, p.410).

The advantage of a sole proprietorship is that it is easy to start, requires minimal formalities and the owner has sole control over the affairs of the business. Conversely, he is also personally liable for all the losses and debts and he could lose all his property if the business is unable to pay the debt.

Partnerships are another organizational form where two or more people come together with the common purpose of making profit. It is also easy to start since the partners simply sign a partnership deed sating the rights and obligations of each partner. The advantage is that the partners can jointly raise capital for the business, which also benefits from the expertise of different partners. However, partners are also jointly and severally liable for the business debts and the partnership can end if one of the partners dies.

The limited liability company is the most commonly used organizational form because owners come together and contribute capital to create an artificial entity that has a separate legal identity from them and which is a legal person in its own right.

Limited liability companies are formed by sending the name and address of the company together with details of the shareholders who are forming the company, their capital contributions and details of proposed officials to the Companies House for registration (Companieshouse.gov.uk). Registering a company is more complex, time-consuming and expensive than the other two organizational forms but it has other benefits such as owners’ limited liability so that they are not held accountable for the company obligations and other fringe benefits (Steingold , p.5). Private limited companies have the additional disadvantage of restricting the number of shareholders and their ability to freely transferring their shares the way shareholders of public limited companies can do.

2.      Access to financing

Limited liability companies can access financing much easier than sole proprietorships or partnerships where the business capital is limited to the owner’s contributions. Companies not only raise money through equity financing where the owners contribute capital to set up the business and the shares of the company are sold to make more money but also debt financing (McLaughlin , p. 138). Since companies are separate legal entities, they can enter into contracts and borrow money for financing. Debt financing includes debentures, commercial papers, bank loans, overdraft facilities and lease financing. The company charges its property such as assets, equipment and stock to secure the debt.

3.      Organizational management

Unlike sole proprietorships and partnerships that are managed by the individuals who set them up, limited liability companies are usually not managed by the shareholders. Companies are owned by shareholders who are the people that came together and contributed capital towards its formation, but they are run by directors who are appointed. Shareholders appoint directors who are either also shareholders or other independent persons who have the knowledge and skills to run the type of business the shareholders wish to engage in. The directors then owe the shareholders a fiduciary duty which is a responsibility to act in the best interests of the shareholders and to keep them informed of all activities relating to running the business (Miller and Jentz , p.558). The directors usually appoint a managing director from among them to run the daily affairs of the business. Shareholders hold an annual general meeting where the management reports on the annual activities of the business.

4.      Employment law

Entrepreneurs also need to take the prevailing employment laws into account. The persons wishing to start a business need to ensure that the employees are legally resident in the UK and have a right to work. The entrepreneur also needs to have a plan as to how he shall provide for employee rights such as contracts of employment, minimum wage requirements, working hours, leave and vacations, pensions and health and safety at work. The Trade Union Congress offers a comprehensive guide on statutory employment rights that relate to work life balance and the minimum limits an employer can provide without breaking the law (tuc.org.uk).  

5.      Taxation

Limited liability companies are liable to pay corporation tax because they are independent legal entities that operate to make profits. As of 2013, companies that turn a profit of over 300,000 pounds pay corporation tax at the rate of 23% of profit and 20% when the business makes less profit than that. Entrepreneurs who have settled on a limited liability company need to decide which system they will use to pay the tax as they can pay through direct debit, online banking or CHAPS payment. However, the business ought to have registered for tax payment in the first instance. Sole proprietors keep all the profits and pay personal income tax on it just as partnerships apportion all profits and partners then pay income tax on their earnings.

6.      Insolvency

Sole proprietors are personally for all business debts so when the business becomes insolvent, they can lose even their personal assets which go toward settling the debt. Partners are also personally and collectively liable for their debts so an entrepreneur wishing to start a business needs to take this into account. On the other hand, when companies become insolvent, shareholders are only liable to the extent of their contribution. The Companies Act and the Insolvency Act provide for the appointment of a liquidator to manage the assets of the company until the debt to creditors is discharged in full (McLaughlin , p.367). The company pays the secured creditors first, such as those holding debentures, mortgages and charges over the business assets before settling unsecured creditors.

Conclusion

This discussion has explored the issues that an entrepreneur needs to consider when deciding how to go into business. It is clear that the organizational form an entrepreneur chooses has a great impact on their personal liability, ability to access financing and taxation. It also affects the type of management the entrepreneur can adopt and the steps that are taken should the business go insolvent. The entrepreneur also needs to consider issues of general compliance with the law such as licensing and employment law.

References

Trades Union Congress, (2013), Employment rights, Retrieved July 18, 2013 from: http://www.tuc.org.uk/workplace/index.cfm?mins=244&minors=4&majorsubjectID=2

McLaughlin, S. (2013) Unlocking company law, 2^nd Ed., Oxon: Routledge

Miller, R. (2012) Modern Principles of Business Law, Mason-Ohio, South-Western Cengage Learning

Miller, R. and Jentz, G. (2011) Business Law Today, 9^th Ed., Mason-Ohio, South-Western Cengage Learning

Steingold, F. (2008) Legal guide for starting and running a small business, 9^th Ed., Berekeley-California: Nolo

Companies House, (2013), Starting a new Company, Retrieved July 18, 2013 from: http://www.companieshouse.gov.uk/infoAndGuide/companyRegistration.shtml

The Crown, (2013), Welcome to Gov.UK, Retrieved July 18 2013 from: https://www.gov.uk/