Establishing a BusinessThe optional dynamics of structure,

organisation/management and related factors

Steven JanesPartner28th July

2011

Wright Hassall LLP• Full service commercial law firm• 33 partners and over 200 staff• Turnover in 2010: £13.1 million• Sectors: financial services, technology, logistics,

charities, education, sport, social housing & agriculture

Selecting a Business Structure Key characteristics of a good business structure

are: • Flexibility to accommodate changing

circumstances with minimum consequences • Protection against business risks • Minimization of costs, including tax• Efficient distribution of profits

Common Business Structures• Limited company• Partnership• Limited liability partnership• Sole trader

More Exotic Business Structures• Social enterprises• Joint ventures• Franchises• Charities• Trusts• Hybrids

Ease of Starting Up• Sole trader is the easiest structure to adopt• BUT electronic company formations has

simplified setting up other structures• Understand costs involved in setting up and

maintaining your chosen structure. Bear in mind that:• Corporate structures are more expensive• Trusts, hybrids etc are more complex

Purpose of the Business• Market sector in which business operates may

help to decide which structure to pursue• Consider if assets should be divested to protect

them from creditors• Business structure may influence eligibility for

subsidies and grants

Extraction of profit / earnings• You are in business to make money so consider

most tax-effective way of withdrawing funds:• Salary• Bonus• Benefits in kind• Profit shares• Royalties (IPRs)• Dividends and loan repayments

Strategic Factors• Consider your business in the context of your

overall ‘financial life’:• Is the business your main source of wealth?• Do you want the business to pay for your

retirement?• Do you want it to provide other financial

benefits?• Do you want to pass it on to family members

or sell?

The Cast List• Who else needs to be accommodated within the

business?• Family or friends?• Providers of capital?• Partners?• Key collaborators?

Taxation• Tax liability may be calculated differently for each

structure. Considerations include tax on: • Profits and VAT• Stamp duty• Capital gains tax• Capital allowances• Business rates• PAYE/ ‘payroll tax’ and other taxes

Liability / Exposure of Personal Assets• All businesses carry an element of risk. Identify

risk factors in order to minimise liability• Sole traders and partnerships do not carry legal

protection for owners. Proprietors are personally liable for debts and liabilities and partners are joint and severally liable.

• Limited companies allow business debts to be ring-fenced from owners’ personal finances. Shareholders’ liability limited to their share in the equity.

Capital & Finance• Most businesses need an injection of capital at some

point:• Personal wealth (often the only option for sole

traders)• External sources• Non-participating investors (e.g. business angels)• Stock exchange listing

Other Factors• Business tradition• Formality / regulation• Borders• Necessity

Evolution of the ‘Owner Manager’• Who are the owners?• Who controls the business?• Which is the necessary condition – ownership or

management/control?

Management Separate from Ownership?• “In the real world no owner is going to let someone

control their business. Non-owner managers can make contributions, but complete control will always rest with the owner”

• “If non-owner managers do not feel that they possess ownership in the business, then they will be less effective managers”

[Source – Linked-in forum on business management, 2010]

Ownership Management Performance • Does private equity create better-performing

companies?• Is private equity good because it defuses conflict

between owners and managers?• Are professional investors more detached and less

emotional about the business?• Does professional investment inevitably lead to

short-term profits over long-term investment?• Is there a model for ‘Sustainable Capitalism’?

Corporate Governance ‘101’• The constitution – ‘articles’; share types;

shareholders’ agreements• Roles of the board and shareholders• How shareholders can:

• Convene meetings• Influence the agenda• Affect board decisions

• How voting takes place

Stakeholder & Other External Factors• Customers• Suppliers• Competitors• Neighbours• Regulators• Employees

Legal Risks: if you can’t stand the heat…• Don’t become an entrepreneur• Stick to National Savings• Don’t go out without your lawyer• Avoid birds, pigs and any other viral sectors

Key Moments of Business Structure Risk• Hiring employees• Selling a manufactured product• Giving advice• Winning a major new contract / customer• Eureka moments – new inventions• Marriage & divorce (aka mergers and acquisitions)• Exits

Recipe for a Peaceful Night’s Sleep• Write everything down• Keep legal documents simple• Put your trust in written agreements• Good lawyers (& accountants) are priceless • Don’t forget what insurance is for… • When assessing risk, think ‘feline’:

Avoid

Control

Accept or

Transfer

Steven JanesPartner

steven.janes@wrighthassall.co.uk

01926 880752

Any Questions?