The Blog - Archive

December 2008



19/12/08 Back to Basics

There are a number of aspects to consider when starting out in business for the first time. Roger Turner and Daniel Stanton of D'Angibau Solicitors pick out the essentials from a legal perspective.

Structure
The business structure you use will depend to a large extent on your tax position, the likely growth of the business, provision for succession and the perception of the business to the wider public. The most straightforward structure for a business is as the sole trader, who has 100% ownership and control. It is suitable for businesses that are likely to grow steadily and organically. Succession is achieved by selling or gifting business assets together with the goodwill.

Businesses involving two or more people can operate as a partnership. The partners' share of profits, assets, rights and responsibilities is usually governed by a partnership agreement as the default of profits and assets being shared equally is rarely suitable. Partnership agreements can also provide for buy-outs between partners without bringing the partnership to an end. Partners are taxed individually on their share of profits. Succession is usually achieved by a deed of retirement and succession.

The public often see limited companies as larger businesses and therefore more reliable business suppliers or customers but this is not always the case. The shareholders' liability to a creditor is limited to the amount invested in the company, which can be as little as £1. This makes it attractive for high-risk ventures, although banks and landlords will almost certainly ask for a personal guarantee from any directors. Companies pay corporation tax rather than income tax and the different rules (and rates) make it worthwhile to seek an accountant’s advice before deciding on the business structure to employ. Succession is achieved by selling the shares in the company.

Limited Liability Partnerships (LLPs) are a hybrid structure, giving the limited liability associated with a limited company with the tax structure of a partnership. LLPs have 'members' rather than partners or directors. LLPs need to be governed by a properly drawn-up LLP agreement in the same way as partnerships are governed by a partnership agreement. Succession is achieved by making provision in the LLP agreement, retiring the previous member and appointing a new member.

Goodwill and franchising
Having identified a need for their goods and services in the marketplace, all start-up businesses have the problem of generating awareness, or 'goodwill', of the business and goods or services they provide. Some will use major advertising and awareness campaigns and sponsorship. This is particularly suitable if the business has some creative talent and experience at its disposal. Some business will prefer to 'buy-in' their goodwill and take a franchise. Franchises involve the use of a well-known brand name and expertise to sell goods or services with (usually) a commitment to international, nationwide or regional advertising and economies of scale in purchasing stock or equipment. In return the 'Franchisor' will usually get an up-front franchise fee, training costs, a percentage of turnover plus a 'tie' on most of the stock, equipment and advertising materials. There will also be severe restrictions on the operation of the business to ensure that all the franchises operate the same.

Premises
Every business will need premises of some description, whether retail shops, offices, a warehouse or factory, vehicle depot, a garage or shed or a spare room in a residential property. The type of premises will depend on the type of business and the likely expansion of it. Purchasing freehold property is not viable for most start-up businesses due to the large outlay and the reluctance of lenders to finance a high enough proportion of the purchase price. It is more customary for start-up businesses to take a lease of premises rather than an outright purchase, but this is not something to be taken up lightly, as the costs over a 5 or 10-year term can still be very substantial, particularly if you have an obligation to repair the structure of the building or contribute towards it. If you need to take a lease, you can look out for 'starter units' with a shorter tenancy period so you are not burdened with a long-term commitment.

You could use your own home provided that the Local Authority agree that planning permission is not required for the change of use, your insurer does not object and you do not have any restrictions (covenants) upon your property preventing trade or business use.

Employment
Hiring and maintaining key staff is a major factor in the success of any growing business. Hiring, promoting, demoting and dismissing on the grounds of sex (including maternity), sexuality, race, disability and membership of a trade union is prohibited and one wrong move could mean ending up in the Employment Tribunal. It is important when making any employment decision to have a list of characteristics and attributes you are looking for from your employees at the start of the process and to consider whether your advertisements (in the case of new employees) or worker manuals and job descriptions (in the case of existing employees) contain sufficient information so that each employee or prospective employee knows what is expected of them. You are also more likely to avoid Tribunals if you are consistent with your decisions, encourage communication between staff and management and take grievances seriously.

You must ensure that you keep up to date with the minimum wage. The rates as from 1st October 2007 are £5.52 per hour for workers aged 22 years and older, £4.60 per hour for workers aged 18-21 inclusive and £3.40 per hour for all workers under 18 and no longer of compulsory school age

You should also keep up-to-date with minimum notice periods (currently a week for the first two years then 2–12 weeks depending on length of service), the 48-hour week (and the opportunities for employees to opt-out) and 'whistle-blowing' (the right for an employee to have employment protection if they report a breach of the law to the appropriate authorities). If you choose to take on an existing business or are taking over a major customer contract from another supplier, you could be obliged to take on the staff employed with that business or in carrying out that contract on the same terms as they currently enjoy. Do not assume you can avoid this by dismissing staff a few weeks or months after the transfer.

You should obtain advice in producing an employment contract and worker manual as early possible and before you take on any employees, as it is generally too late once to make changes after this time. Your contract should include your policy on discipline, grievances, absence, maternity and paternity and sickness. All offers of employment should be made 'subject to signing an employment contract on our standard terms'.

Finance
Lenders are surprisingly willing to lend to new business ventures with no track record but usually only where the borrower provides a large proportion of the finance for the acquisition or start-up. They will require a right to step in if the business is under-performing and sell the business if there are any problems with repayment of the loan. You may be required to offer up your own home as security for the loan (even if the loan is to your company). Venture capitalists, banks and finance houses can sometimes offer capital investment based on a stake in the business however this can be expensive to set up and they will want a significant say in the running of the business. The advantage of this approach is the expertise that such investors can provide.

Ideally if you have sufficient funds to finance the start-up then you can do so without being concerned about the requirements of lenders or venture capitalists and accordingly you will have more freedom to run your business but be wary of leaving your business undercapitalised, without sufficient funds to invest in stock and equipment to develop the business.

Suppliers and Customers
Your relationships with suppliers and customers will be vitally important to the success of your business. You need to define the apportionment of liabilities between you and your suppliers by checking the terms and conditions upon which they supply goods and services, not only to protect you from liability claims but also to define precisely what is to be done so that disputes are less likely and your business relationships are affected as little as possible. This is important whatever the value of the orders you are placing, but you need to concentrate your resources on the terms and conditions for your biggest suppliers. Look in particular for the pricing structure, definition of goods, warranties and any exclusion clauses.

Drawing up a standard set of terms and conditions for your customers is essential to ensure that you are only liable to rectify matters that are under your control and strike a reasonable balance between you and the customer. Every business is different and your terms need to reflect your individual business. Standard terms can give you the comfort that although disputes may arise, you have a document to refer to which may protect you in some way. It is also important that the terms are made available to the customer before you accept their order or they accept your offer of a sale. End consumers have more rights than wholesalers and other intermediaries and you need to be aware of these. If you are supplying goods, you also need to consider appropriate warnings and safety features to reduce the likelihood of misuse by the consumer leading to damage to property or personal injury for which you could be liable.

 

15/12/08 Too much month left at the end of the money?

Daniel Stanton of D’Angibau Solicitors looks at the potential pitfalls in taking a second job or setting up business from home.

News of an economic downturn will inevitably lead us to think of what’s left of the money we’ve earned until the next payday, and we all deal with it in different ways. You may consider whether to take up one of the many ‘get rich quick’ schemes, but then if it looks too good to be true, it probably is.

For some there is the chance to take on a second job or running a business from home. It is important to make sure first of all that your current employment contract doesn’t prohibit you taking other jobs or require that you devote your ‘full working time and attention’ to the employer. Employment contracts may also prevent you from working in the same industry within a specific area or at all during your employment and you should be sensitive to your employer’s interests by not working in direct competition. You should also be aware that taking a second job could affect your tax position and tax credit and benefit entitlements.

Perhaps you have a hobby or interest with specialist skills and knowledge that might be profitable if offered to the wider public? If so, starting your own business could be an option. You may be considering becoming a representative for a home shopping catalogue or selling door-to-door, in which case you will most likely be taking a franchise of a larger business and will be presented with an agreement to sign. Franchises involve the use of a well-known brand name and expertise to sell goods or services with (usually) a commitment to international, nationwide or regional advertising and economies of scale in purchasing stock or equipment. You may also have to pay a franchise fee in advance. It’s important to consider what restrictions there would be on multiple franchisees working in the same area and whether the projected sales are likely to be achieved.

If you are intending to use your own home for your business then you must ensure that you check with the Local Authority that planning permission is not required for the change of some parts of your home from residential to business or mixed use and you do not have any restrictions (covenants) upon your property preventing trade or business use. Most flats let on long leases prevent trade or business use. Some covenants on freehold houses may no longer be enforceable or the beneficiaries may only charge a nominal fee for permission, but you need to check the legal position beforehand. You will also need to ensure that the property is properly insured for business use and that you also put in place third party liability insurance.

If you are working from and updating a list of potential customers, you will need to comply with data protection legislation and you must ensure that you are registered with the Information Commissioner or fall within the franchisor’s data protection registration? If you are cold-calling or leafleting, you may wish to consider the Code of Practice of the Direct Selling Association and whether it would benefit you to join the OFT Consumer Code Approval Scheme.

Drawing up a standard set of terms and conditions for your customers is essential to ensure that you are only liable to rectify matters that are under your control and strike a reasonable balance between you and the customer. Every business is different and your terms need to reflect your individual business. Standard terms can give you the comfort that although disputes may arise, you have a document to refer to which may protect you in some way. It is also important that the terms are made available to the customer before you accept their order or they accept your offer of a sale.

Finally, as your business grows it may become a full-time occupation and you may wish to expand and take on premises and staff. The involvement of a solicitor to assist in the acquisition of a property is key to ensuring that you obtain good title to the property and to deal with the requirements of any lender. Also at this point it is very useful to have a solicitor on hand to produce an employment contract and worker manual as early possible and before you take on any employees, as it is generally too late to make changes after this time. Your contract should include your policy on discipline, grievances, absence, maternity and paternity and sickness. All offers of employment should be made ‘subject to signing an employment contract on our standard terms’.

 

12/12/08 Transfer of Employees on the Transfer of a Business (or part of it)

This is a brief reminder of the general rule that employees of a business are transferred when a ‘substantial part’ of the business is sold to a purchaser. This means that buyers will usually need to be provided with full details of the pay and conditions of the employees, together with details of any potential claims any employees may have against the employer.

The rule can also apply to employees working on goods or services for a single customer of the business. If that customer switches suppliers, the employees may be entitled to be transferred to the new supplier. This could lead to teams of employees being entitled to move across.

Any major changes to your business need to be considered carefully against this background.

by Daniel Stanton

 

11/12/08 Section 17 Notices - A Sigh of Relief for Landlords

When commercial tenants assign a lease, they often do so having first guaranteed the obligations of the next tenant in line. If the lease was granted prior to 1st January 1996, they will have guaranteed to comply with the terms of the lease until its expiry, regardless of the number of hands through which the lease passes.

In order to invoke this guarantee the landlord needs to serve a notice upon the former tenant setting out the amount due. The notice must be served within 6 months else that sum is not recoverable. Once the notice has been served then depending on the wording of the notice the sum can be increased if it turns out that more is payable.

Where there is an outstanding rent review which has not been settled, a decision of the Court of Appeal in 2006 stated that a notice needed to be served on the former tenant specifying the amount due as "nil" if the landlord wanted to preserve its rights to recover, further notices needed to be served every 6 months and a later notice needed to be served once the review had been determined.

This decision of the Court of Appeal was overturned on further appeal. All that is now required is a single notice served less than 6 months after the date when the increase has been agreed or determined.

This will come as a relief to commercial landlords, who no longer need to give precautionary notices to former tenants where there was no default by the current tenant, easing the administrative burden on both Landlord and Tenant.

by Daniel Stanton

 

05/12/08 Shared Ownership Housing - update

Shared ownership allows homebuyers to purchase a share of a property and ‘rent’ the other share from a Housing Association under a long lease. These arrangements have already been criticised because of the ability to bring the lease to an end and swallow the part purchased for non-payment of the rent under the lease. Shared ownership has allowed many people to buy in to the property market, although whether this is a good or bad thing depends on your personal opinion of the property market at present.

The Government is concerned to prevent the loss of affordable housing in rural areas by shared ownership tenants ‘staircasing’ up to full ownership to ensure that shared ownership houses in these areas remain affordable and available on a shared ownership basis forever.

The Department for Communities and Local Government has issued a consultation paper, Shared Ownership and Leasehold Enfranchisement and Designation of "Protected Areas". Properties in "protected areas" would be subject to restrictions placed in the lease to stop the tenant from purchasing further shares beyond a certain level.

The consultation is open to responses until 31 December 2008. We would strongly suggest that any clients with experiences of shared ownership (particularly in rural areas) take the time to contribute to the consultation and forward a copy your contributions to us.

by Natalie Clarke

 

03/12/08

With the prevalence of identity theft in all its forms, in June 2008 the Land Registry produced a helpful guide aimed at assisting landowners to prevent another person falsely claiming rights or ownership over their property and selling it to another.

The guide lists some situations where fraudulent transactions are more likely, such as:

  • where a relationship breaks down
  • where a property is empty or is bought to let
  • where the owner is abroad or absent
  • where the owner is infirm or in a home.

The full text of the guide can be found at http://www1.landregistry.gov.uk/assets/library/documents/public_guide_017.pdf

by Daniel Stanton

 

01/12/08 Selling your house by raffle

The sale by Brian and Wendy Wilshaw of their property in mid-Devon has sparked a great deal of media interest. Many admire their ingenuity in the face of difficult times in the housing market. Unfortunately for the Wilshaws, their ‘sale by raffle’ is currently in limbo whilst the gambling commission look into whether the raffle is a ‘simple lottery’ or a ‘prize competition’.

You may have heard commentators speak of the ‘skill, judgement or knowledge’ required by the participants in order for this to be considered a genuine prize competition, thus falling outside the controls imposed by the Gambling Act. Deciding what level of skill, judgement or knowledge to set as a benchmark is a difficult balancing act between the need to comply with the minimum requirements of the Act to avoid criminal prosecution and setting a question or skill test which is not so difficult as to deter most of the market.

With a second house raffle being set up for a property in Cumbria, we should all have more of an idea in the coming months of the views of the gambling commission, but one conclusion can already be drawn – it is essential to carry out initial research as to the difficulty of the question or questions raised or the skill or judgement test applied.

It also mustn’t be forgotten that there are important issues to consider in the conveyancing of the property once it has been ‘purchased’, and Stamp Duty Land Tax and Land Registry requirements must not be overlooked. It is also necessary to carry out a full investigation of precisely what has been purchased to rectify any problems that could prevent or delay a later sale.

It is arguable that the seller of the property has a greater duty to give full information about the property at the outset to avoid accusations of fraud. The usual sale process involves scrutiny by a solicitor acting for the buyer, which will almost certainly be absent when the buyer purchases a raffle ticket.

A house raffle is not something to be considered lightly without considerable research and legal advice beforehand.

 


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