This book is about running your business through a limited company but first you must be clear about what you need to do. This initial chapter will help you decide this. It covers:

• starting in business
• being a sole trader or going into partnership
• buying a business
• getting professional help
• having a company or not.

STARTING IN BUSINESS

So you’re going into business. You are going to become one of those entrepreneurs with a Rolls Royce and an expense account.

If only it were that easy. You have many decisions to take before you take the plunge into business.

Being in business

If you are engaged in an occupation, work or trade, whether commercial, industrial or professional, which includes the buying and selling of services then you are in business. Note that there is no mention of the word profit. Of course you would not be in business if you were not going to make a profit but it is not compulsory, just advisable.

This book is not intended to help you set up a business. It assumes you already have a product or service that you wish to sell or trade in. This book is designed to help you administer the business you have set up.

Owning your business

Asking who owns your business may seem a silly question but there can easily be other people involved. Your spouse or partner or son or daughter may work in the business or some-one may have lent you some money to start it up. You must make sure that you know precisely the relationship any of these people have with you in your enterprise so that their interest can be properly taken into account.

Problems in business invariably arise through sloppy arrangements about money, so be advised to clarify these at the start.

Naming your business

There are a number of factors to take into account when deciding what to call your business. These are more fully discussed in Chapter 6, but you must choose a suitable name as this is what the public will refer to when talking about your business.

Defining your business

It is as well to define precisely what product or service your business is going to supply. Not only must you be able to inform your potential customers what you do but you must also be able to market and advertise your wares simply but succinctly. You must make it easy for your customer to deal with you.

BEING A SOLE TRADER OR GOING INTO PARTNERSHIP

Creating your set-up

You have established that you have a business with a name and a product or service to sell. You know who the owner is. You must now consider the implications of this. You have to decide what legal form your business will take. You can be a:

• sole trader
• partnership.

Being a sole trader

The word sole in this context means alone or the one and only. In business terms a sole trader is where the proprietor is the sole owner of a business although he or she may have employees.

Being a partnership

A partnership is defined by law in the Partnership Act 1890. It is the relationship which subsists between persons carrying on a business in common with a view to profit.

Put another way it is the relationship between people who have agreed to share the profits of a business carried on by all or any of them on behalf of all of them.

It might be advantageous to examine a little history. In the Middle Ages, when trading was growing fast, the individual traders found considerable advantage in combining with each other to carry on their business. The advantage was that it enabled them to command greater amounts of capital money they could not individually bring together and it helped them to combine and share their common experience and their profits. This was the beginning of partnerships.

Now if you have an arrangement to share the profits of your business with another person, the chances are that you are in partnership, sometimes known as a ‘firm’. This may be a close friend with whom you have a rapport and would work well or someone who may have put money into your business. There is now, under the Limited Liability Partnerships Act 2000 the opportunity to form a partnership with limited liability. It must be registered with the Registrar of Companies and two of the partners called ‘designated members’ must accept responsibility for sending information to Companies House. This form of partnership is treated for tax purposes like any other.

BUYING A BUSINESS

While thinking of going into business it may have occurred to you that it might be simpler to buy a ready made business. After all, the hard slog of building up your customer base would be eliminated. The premises would already exist. There may be some staff and the stock may already be in the warehouse.

Don’t be misled.

Why is the owner selling? Have you the money to compensate the owner for building it up? Suppose you pay too much. If you are thinking of buying a business to make life easy, think again. Being in business is about responsibility.

There is no easy way to establishing your own business.

Seven steps to making your decision

Here is a simple guide to what you should consider when buying a business.

• 1.If you are already in business what are you looking to add?
• 2.Define the business profile you would like to acquire.
• 3.Learn about your market and do the research.
• 4.What are the sources of businesses for sale?
• 5.What effect will you have on the business if you buy it?
• 6.What is the maximum price you are prepared to pay?
• 7.Are you ready to negotiate?

These questions are by no means exhaustive but they give you an idea of the things you should be considering before you put your money into a new venture.

Summary

• 1.Don’t be tempted to pay too much for the business because you think it will give you a flying start.
• 2.Make sure you are entering a marketplace you can compete in.
• 3.Clarify the business you want to be in including its size, location and potential.
• 4.Be realistic about the effect of a change of ownership.
• 5.Question everything.
• 6.Crystallise your negotiating position. Know your top price and the one you are prepared to start at and stick to them. There is no such thing as a right price.
• 7.Obtain all the help you can from independent professional advisers (accountants, bankers, solicitors, surveyors, etc).

GETTING PROFESSIONAL HELP

Too many people either think they know it all or trust to luck when it comes to business matters. But even the most successful entrepreneur will tell you that they are always ready to listen to sound advice. The problem is how do you know it is sound. That comes with experience.

It is best to seek out the right professional advisers as early in your planning as possible. They may come up with advice which can materially affect the way your business operates and you can incorporate it before the process gets too far. It is important to avoid errors and misjudgments before they happen and unless this is done you may start your business with a permanent handicap.

Business advice can be obtained from:

• accountants
• bankers
• designers
• financial planners
• solicitors
• surveyors and estate agents.

Here are some points to watch.

Accountants

The term accountant does not necessarily mean they have any formal qualification. But you would be well advised to find an accountant who is a member of a recognised association as you will have some guarantee that he has followed a course of training and passed examinations in the skills required. The main bodies are:

• The Institute of Chartered Accountants in England & Wales (with FCA or ACA after their name)
• The Institute of Chartered Accountants of Scotland (CA)
• The Chartered Association of Certified Accountants (FCCA or ACCA)
• The Institute of Management Consultants (FIMA or AIMA) who deal mainly in management consultancy work as their name implies.

The cost should be discussed and agreed before any work is carried out.

Bankers

Banks offer a wide range of services including current accounts, loans and assistance with imports and exports. A particular bank can be chosen for a number of reasons, for example convenience, knowledge of the staff or even to separate your business accounts from your personal affairs. Larger branches have more discretionary powers as they do not have to pass decisions up to regional managers for approval but these would only be used when substantial funds are required.

Shop around to find what it will cost to run your account.

Designers

A good designer may be worth more than appears on the surface. The image of your product or the fitting out of your premises are important in giving your customers a feel for your business. This also applies to what your employees wear or what your stationery looks like. An impressive corporate image will always stand you in good stead.

Financial planners

They may help you in your marketing strategy, your budget projections, your organisation or the amount of money you may need to get your business off the ground. It is difficult to choose one but most large accountancy practices have specialist sections. You will normally be charged a flat fee based on your requirements.

Solicitors

A solicitor will be particularly useful in advising on the legal form of your business, the formation of your company, any contracts you may enter into and registration of patents and product protection. Costs vary but a solicitor will normally give you an estimate and some may give you a package deal. Fees must be ‘fair and reasonable’ by law.

Solicitors also specialise so make sure you get one who can deal with your needs. The larger the firm the bigger the range of activities they are likely to cover.

Surveyors and estate agents

Any transactions involving land or buildings will need the expertise of a surveyor to assure you that you are not entering into a contract unwisely. Matters covered include:

• surveys of premises
• planning permissions or change of the use of premises
• rates and rateable values
• whether the title is leasehold or freehold
• repairs and maintenance clauses in agreements.

The recognised body is The Royal Institution of Chartered Surveyors (FRICS or ARICS) and if you are involved in the valuations you could use the services of a member of the Incorporated Society of Valuers and Auctioneers.

Costs are again a matter of negotiation and agreement.

With all the above professional advisers do not hesitate to take out references or seek advice from people you know who use them. Personal recommendations from friends and colleagues are usually sound.

HAVING A COMPANY OR NOT

You now have to decide whether you want to trade through a company or not. Like life itself there are advantages and disadvantages in everything but the decision has to be taken. Nothing is irrevocable but remember there is always a cost. It is far better to weigh up the pros and cons first.

How the company was born

Look at a little history again.

When trade increased dramatically in the 19th century traders began to get together and run their businesses jointly. However, the increased activity also increased the burdens on individual partners. The property and debts of the firm were considered to be the property and debts of the individual partners. Therefore partnerships had no legal existence apart from the individual partners.

Then in 1844 an Act of Parliament was passed for the Registration of Joint Stock Companies and such an incorporated company could now hold property, incur debts and sue and be sued in its own name. The members (or partners) were no longer responsible for such matters individually. This was known as limited liability.

Differences between a company and a partnership or sole trader

Some of the differences are:

	Partnership or sole trader	Company
Members’ liability	Unlimited	Limited
Number of members	Limited	Unlimited
Transfer of interest	Only with consent of other partners	Shares may be transferred
Capital introduced	By arrangement with other partners	Fixed by company rules
Profit sharing	-ditto-	-ditto-

Advantages of a company and of a partnership

Advantages of a company

• 1.A company has limited liability and it does not extend to the separate assets of each member whereas a partner’s liabilities are not limited and extend, if necessary, to the whole of their individual estates.
• 2.The shares of a company are easily transferred but the value of the interest of a partner is much more difficult to determine.
• 3.The death of a company member does not affect the existence of a company. If a partner dies, however, the partnership ceases to exist.
• 4.Profits of a company are distributed by way of dividend which are unearned for tax purposes whereas profits of a partnership are earned income. However, the tax changes which continually take place with the Budget and subsequent Finance Acts can drastically alter how each of these is treated and should be checked at the time.

Advantages of a partnership

• 1.A partnership may tend to give a more personal aspect to dealings.
• 2.There are no heavy setting-up expenses to a partnership.
• 3.The activities of the partnership are not subject to restriction as with a company which is limited by the Objects clause in its Memorandum of Association. Currently Objects clauses allow almost anything that is legal.
• 4.Partners may override the Partnership Act by agreement amongst themselves whereas companies have to abide by the Companies Acts.
• 5.All partners can take part in the management of the business and no change in the constitution can take place without the consent of all the partners. In a company the will of the majority operates but the company is normally run day to day by the board of directors.
• 6.Partnerships have no registration formalities.

You should by now have considered all aspects of your business and have made up your mind you would like to run your business through a company. The rest of this book explains in detail how to go about it.

CASE STUDIES

Introduction

Imagine the following three fictitious businesses have formed their own companies. The progress of these companies will be traced in the case studies throughout the succeeding chapters and this should help you understand the various facets of running a company.

Dean Chapman is a young man in his late 20s with an awareness of the growing incidence of vandalism and theft in his local town. He had seen it firsthand at the engineering factory where he worked. As an entrepreneur, however, he realised that this meant there must be an increasing demand for security both at home and in the factory and office. He therefore decided that he would quit his job and set himself up to provide solutions to vandalism and theft by security measures geared to the customer. He called his company Chapman Security Ltd.

Hannah Phillips had always been artistic, particularly where jewellery was concerned. Her children were now off her hands and she joined a further education class in jewellery design. It was there she met Usha Patel, who was clearly a talented designer concentrating on Asian designs. They became firm friends and learned techniques from one another. It became clear, as they both obtained more and more orders for their unique designs, that this could not continue as a hobby. They decided to set up shop together and with advice from an accountant formed their company Diamond Designs Ltd.

Harry Burgess was a successful businessman in the building industry, who had bought some property over the years which he considered to be his ‘pension’. One of these properties was a mansion which he had converted into apartments. He wished to convert some of this ‘pension’ into cash and, finding it was difficult to sell as a whole property with tenants, he was advised to sell each apartment separately. However, this caused some complications as there were communal parts of the property, such as car parks, gardens and stairways, used by all the tenants. The solution was to form a management company to deal with these and he called it Smiths Towers Management Co Ltd.

ACTION POINTS AND REMINDERS

• 1.Who are the people directly involved in your business and what do they contribute to it?
• 2.Consider all the possible names you might wish to call your business.
• 3.Are you sure of all the products or services you intend to supply from your business?
• 4.Will you be a sole trader or do you need a partner?
• 5.Are you contemplating purchasing a ‘ready made’ business? If so where from?
• 6.Name, if applicable, your possible accountant, banker, designer, financial planner, solicitor and surveyor.

Now read the case studies again.

If, as a result of completing these answers, you are convinced that you wish to form a company proceed to Chapter 2.