In part one of the blog that was published last week, I gave a bit of guidance for new business with regards to Business Structure and Liability. Following on from this I felt it may be useful for those businesses if I was to offer further guidance on Finance/ Tax and Intelectual Property. My name is Mark Gipson.
As a self-employed sole trader or as a partner, you will be responsible for your own tax so you will need to create a reserve to meet tax in arrears. Whereas if you are an employee of a limited company then the employer will arrange for the payment of tax through the PAYE system. In addition the profit of the company will be subject to corporation tax. You will still need to ensure that the liabilities are met on time and there is sufficient cash within the business to pay your liabilities.
A limited liability partnership, despite the implications of its name, has far more in common with a company than a partnership (the benefits of limited liability, for example), but when it comes to taxation, the members of an LLP are taxed individually in the same way that members of an incorporated partnership are.
Any ideas or inventions that you create as a sole trader or as a partner will belong either to you as the creator or author, or potentially jointly with one of your partners. However, if you are operating through a company or an LLP then it will be important to clarify whether the intellectual property rights (IPR) belong to you or to the company/LLP.
If you are engaged as an employee to develop IPR for the company then the default position is that the company owns the IPR, not the employee. The company may potentially be contractually obliged to assign these rights to a third party.
In the case of a partnership or sole trader it is difficult to sometimes borrow money or raise capital from an external party since there is no vehicle in which an outsider can hold a capital interest in the business, unlike a limited liability company where the external capital can be introduced in the form of share capital. In practice it will be easier to raise capital through a company.
As noted above the sole trader or partner will have sole or joint and several liability and will also incur personal liability for any monies that are borrowed. In the case of the company or LLP, the company/LLP will borrow the money, not the individual shareholders/members.
Furthermore, a bank may lend to a company subject to a fixed and floating charge meaning that it will not only have a charge over the assets of the company, including its goodwill and unpaid share value, but also a floating charge over its trading assets which can always be fixed at any time in the event of an insolvency situation. Note however a director of a company or a member of an LLP may also have to give a personal guarantee.
As far as property is concerned, as in other contracts the sole trader or partnership will have unlimited personal liability. In the case of a company or LLP, the company/LLP will be the tenant of a lease. If it is a new company the landlord may require a personal guarantee from the directors or members. When personal guarantees are required, the protection of limited liability is somewhat notional.
If you are operating from home, watch that there are no restrictions either in any tenancy agreement or planning, for example visitors and customers coming to your house.
As a sole trader or in a partnership you will need to still keep records and accounts particularly for tax purposes but also possibly as a requirement of any bank lending.
In the case of a company or LLP, depending on the size of the turnover and the number of employees and balance sheet, you will need to maintain proper records and accounts as well as comply with various annual obligations such as the filing of an annual Return telling the outside world the identity of directors and shareholders as well as filing the annual Accounts.
The filing requirements for companies and LLPs means that historic financial information is more readily available to interested third parties in the form of annual accounts which can be freely downloaded from the Register of Companies. This, combined with the more stringent regulatory requirements, is the price paid for limited liability.
A company or LLP can be incorporated immediately and unlike other countries, there is no requirement for any share capital to be paid up or any minimum share capital. Nevertheless, anybody looking at a company from the point of view of lending money will be able to tell how long it has been trading and, looking at past accounts, its track record and therefore may seek personal guarantees if it does not have sufficient capital or asset base.
Although these topics may seem daunting, with appropriate consideration and research, and where necessary professional advice, the legal and commercial minefields can be overcome allowing your business to prospect and grow.
Mark Gipsson, Director