Smart Resolutions all Small Business Owners Should Make to Improve Cash Flow
As we move into February, how are you getting on with your cashflow? Nicki Kinton of Confident Cashflow shares some great advice about making Smart Resolutions.
In her article, Nicki suggests five great tips which we at Clearly Business Law couldn’t agree with more.
Shareholder agreements, peace and harmony: making a shared business work
Starting a new business, or buying into an existing one, is always an exciting time. All that positivity and enthusiasm! What could possibly go wrong?
Everything new has an element of the unknown, that’s what makes it so thrilling. But with every new business venture comes an element of risk, especially where there are shareholders involved.
Prevention is better than cure
We don’t like to rain on the parade but, as legal advisor we have unfortunately had to step in to help resolve shareholder disputes from time to time and inevitably this has been due to a lack of a formal agreement in place between the battling shareholders.
However amicable things are in the beginning the sad reality is that people can occasionally end up falling out. Without adequate protection in place, this could have a significant and potentially costly impact on the shareholders in dispute and for the whole business.
That’s where a shareholders’ agreement comes in. It’s a private agreement between the shareholders of a company setting out key rights and obligations, with a process for resolving disputes. Unlike the memorandum and articles of association, a shareholders’ agreement is not filed at Companies House and nobody apart from the parties involved needs to know that it exists.
Do I need a shareholders’ agreement?
A shareholders’ agreement is useful for any company with more than one shareholder, especially if they don’t all have equal power. If that’s the shape of your business, here are some things you need to consider…
If a shareholder wants to leave the business, how are his/her shares valued? Can the other shareholders insist on buying the shares before they are offered to others? What happens to a shareholder’s shares if that shareholder dies?
What is the dividend policy? Is there a policy for reinvesting profits into the company?
Are shareholders able to veto the issue of new shares to prevent their shareholding from being diluted?
How will the business deal with a dispute between shareholders?
Can a shareholder be forced to sell his/her shares to the other shareholders? What would the valuation procedure be in that case?
Should shareholders set measures in place to prevent a key shareholder from leaving the business to set up in competition or poaching customers/staff?
Do shareholders want the right to appoint directors of their choosing to ensure their views are taken into account by the board?
Will all shareholders have equal power e.g. when can minority shareholders veto decisions?
With so many factors at play, sorting out a shareholders’ agreement can feel very confusing. Let Clearly Business Law guide you through it : info@clearlybusinesslaw.co.uk
Clients have recently asked us whether electronic signatures are legally binding in contracts. The good news: yes, they are
The Law Commission has confirmed that provided that the person signing intends to authenticate the document and provided that any relevant formalities, such as the signature being witnessed, are satisfied then there should be no difference between a handwritten signature and an electronic signature.
This means that a typed name, clicking an accept button on a website, signing a touchscreen, or any equivalent electronic signature can be valid.
We encourage clients to consider whether electronic signatures might be right for them for quicker and more convenient transactions.
You may have made New Year’s resolutions for yourself but have you thought about resolutions for your business?
We recommend the following:
A fresh new year is the perfect excuse for a clear out of unpaid debts and to put good habits in place for preventing bad debts in future. Pick up the telephone, or if you prefer send a polite email, and if this doesn’t work then we are here to help.
If you have any niggles or issues that have been put on the back burner deal with these head on in the New Year to avoid potential disputes arising or becoming more complex.
Review your terms and conditions and client contracts to make sure they are still the right fit for your business. Do this early and you will start the year on the right foot.
Start as you mean to go on and make a note of any big projects or changes coming up. Pencil dates in with plenty of notice so you aren’t trying to rush with the risk that things are overlooked or missed.
Your business is only as good as the people in it. Make sure you look after your health and wellbeing, and that of the rest of your team, to remain productive for the rest of the year.
If you need help with putting any of these resolutions in place we are here to help, just contact info@clearlybusinesslaw.co.uk
IN CASE YOU MISSED OUR TIPS, YOU CAN READ THEM ALL HERE…
Get it in writing:
Although oral contracts are binding, it is very difficult to prove what has been agreed if there is a dispute
Put a date in the diary:
If you enter into a lease or contract with key dates for giving notice make a note of the date to avoid missing deadlines
Spread the word:
Make sure your business T&Cs are available before orders are placed by customers or clients, simply putting them on your invoices is too late as the contract has already been formed
Listen up:
When dealing with disputes in your business make sure you listen to the other side’s concerns. It is easier to resolve a dispute early on if you know what the issue is
Good grief!:
By law if you are an employer you must set out a grievance procedure and share it in writing with all employees. It doesn’t have to be in your contracts of employment but make sure you have one.
Sharing is caring:
If your business is a limited company with 2+ shareholders you should consider a shareholders agreement to avoid disputes between the shareholders and set out procedures for resolving disputes that do arise
That’s my name!:
Consider protecting your business name by applying for a trade mark. A trade mark is a valuable business asset and will ensure nobody else uses your name
Prevention is better than cure:
If you are going to start working with a new customer/client or supplier make sure you do your homework to find out the exact business entity you are dealing with and consider their financial position
It’s not my fault:
When entering into a contract make sure there are provisions to avoid liability for matters outside your control and reasonably limiting liability for those you can control
For sale:
If you are considering selling your business, start pulling together key information early. Due diligence (where the seller delves into the business to understand what it is buying) is a lengthy process which can be shortened if you have key documents and information to hand
Can I have your autograph?:
contracts can be validly signed electronically provided that there is an intention by the person signing to authenticate the document. Consider using electronic signatures in your business to speed up transactions
Health & Safety:
Although businesses with fewer than five people are not required to have a written statement, all businesses need to assess potential risks in the workplace. Consider having a written statement in any event to ensure the safety and wellbeing of your team
Cash is king:
Unpaid invoices can cripple a business. Review your T&Cs to check you have sufficient protection against non-payment e.g. retention of title, interest on late payment or suspending services
Happy anniversary:
Make it a habit to review your business contracts and T&Cs regularly (e.g. perhaps when you renew your insurance) to make sure they are still working for your business
Buyer beware:
If you are buying a business make sure you make proper enquiries (particularly around any liabilities) so you understand exactly what you are buying and you aren’t stung by any nasty surprises
Dealing with consumers:
If you sell goods or services to consumers (people that are not buying from you in the course of their business) they have extra protection you may not expect – make sure you understand your obligations under the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013
Copycat :
If an employee creates work for his employer the employer will generally be the owner of copyright in the work. However, if the work is created by a freelancer/independent contractor you will need to specifically make provision to deal with copyright as it is otherwise retained by the freelancer/independent contractor. Don’t get caught out!
Competition time!:
Be cautious when running competitions as part of your business marketing campaign – certain types of competitions need approval from the Gambling Commission and all competitions will need to abide by the UK Code of Non-broadcast Advertising and Direct & Promotional Marketing (CAP Code).
Top Secret:
When sharing confidential or commercially sensitive information with others consider using a non-disclosure agreement to protect the information being disclosed from being misused or shared.
London, New York, Paris:
If you enter into contracts with parties in other countries take extra care in ensuring your legal interests are protected and in particular don’t assume that our law will automatically apply to your contract (or that any disputes will be dealt with by courts in England and Wales). Seek advice at an early stage before the contract is signed.
Show me the money!:
The national minimum wage/national living wage is updated every April. Make sure you review your pay rates to ensure you don’t fall foul of any changes and if a younger employee has a birthday check that their pay rate is still appropriate
Insure it:
As your business grows make sure you have adequate insurance that grows with you. If you have employees then Employer Liability Insurance is obligatory.
Don’t bury your head in the sand:
Legal obligations are changing all the time. Make sure you keep up to date with changes to protect your business.
Many businesses begin life as a sole trader, it’s just how most people start out, and you may have heard that you can save tax by running your business through a limited company. With more personal responsibility on you as a sole trader when it comes to factors such as losses and tax, changing to a limited company structure (also known as “incorporation”) might be the best option for you as your business grows, however there are advantages and disadvantages of doing this. We’ll look at those shortly, but first up there are two options to consider when you want to incorporate your business:
Option 1 – Incorporation Relief
This is the default position of any individual incorporating a sole trader business to a limited company. In this option, incorporation relief delays paying capital gains tax (CGT) if you transfer your sole trader business to a limited company in return for shares, rather than cash. This means that any CGT charge on the whole, or part of the gain is postponed until you exit the limited company.
Option 2 – Capital Gains Tax
Alternatively, the sole trader can decide against applying incorporation relief and pay CGT upfront. The little-known benefit of paying CGT immediately is that a Director’s loan account (DLA) worth the value of your sole trader business can be drawn down from the limited company, completely tax-free. You would need a Business valuation prior to going down this route, and this is a tricky process for any business owner to do. The value is calculated based on its tangible and intangible assets. Get in touch with On The Spot to talk about getting an accurate valuation of your business.
Now, let’s look into the Advantages and Disadvantages in detail:
Advantages of Incorporation
Financial
This is one of the key advantages. If you are making profit of more than £40,000 a year, you are more likely to be tax efficient as a limited company rather than a sole trader. The business can pay you salary and dividends, resulting in less tax! Let’s break this down using an example based on a salary of £8,400 and a dividend of £24,000:
As your salary falls within the personal allowance, there is no income tax to pay. In addition, because you’re earning less than £162 a week, you won’t pay national insurance either.
You’ll also be able to add the £3,450 of your unused personal allowance to your £2,000 dividend allowance, meaning you take £5,450 of your dividend tax-free.
The remaining £18,550 is taxed at 7.5% giving a tax charge of £1,391, meaning you take home £31,009 of your £32,400 earnings. Even taking the £7,600 of corporation tax paid by the Company on the profits into account, it still works out much better than what a sole trader would take home.
Being a limited company can also offers more flexibility with regards to expenses. If you travel or eat out while on business, you would be able to claim some or all of this expenditure. You can also buy equipment you need through your business to further increase its profitability.
Limited Liability Protection
Because a limited company is a separate legal entity from its directors, the company can own equipment, incur debts and pay bills in its own right. That means that, in most instances, if the company is sued, your own personal assets, such as your house and car, cannot be seized to pay the debt. If you are a sole trader, on the other hand, your own assets could be seized to pay a business debt, because you and the business are legally the same entity.
Boost your Professional Status
Generally speaking, having Ltd at the end of your company name looks more professional to Customers and gives a sense of kudos. It is important to convey a sense of confidence in yourself and that will, in turn, make Customers confident in you too.
Attract Investment more easily
As a limited company, you will be able to sell shares in your business to investors, relatively easily. Sole traders cannot seek investment in the same way.
Disadvantages of Incorporation
More Paperwork
Whilst Sole traders only have to file a tax return each year, a limited company has to file a set of statutory filleted accounts, a confirmation statement and a Corporation tax return each year.
In addition, each director must file a personal tax return to HMRC. If you are an employee of your company and take a salary, you will also have to register the company as an employer and set up a payroll scheme.
All this means that after incorporation you will either have to spend more time preparing and filing paperwork, or you will need to pay your accountant more to do this for you.
Potential Tax Costs
As the director of a limited company, you would no longer be able to draw money freely out of your business bank account. The company could pay you a salary, pay dividends on the shares you own, and reimburse you for any expenses you incur on its behalf, however, if you were to take money out of the company for any other reason, you may have to pay extra tax.
Another potential tax implication is that when a limited company makes a loss, it can only use that loss against its own profits. Sole traders, on the other hand, may be able to use any loss their business makes to save tax on their other income. For example, if a sole trader is also employed elsewhere, they may be able to use their business losses to reduce the tax they pay on their employment income.
Legal Duties
Your legal responsibilities as company director would include safeguarding the company’s assets and making the decision to cease trading if you knew the company couldn’t survive. If you fail in your legal responsibilities as a director, the consequences can be serious: you could be fined or even go to prison.
Less Privacy
When you file your company’s filleted accounts and confirmation statement, these documents will be in the public domain, available for anyone to see on sites such as Companies House. This means that your figures will be visible to the public, along with your company’s office address. If you didn’t want your home address visible to the public, you can seek to use your accountant’s office or pay annually for a virtual registered address.
Talk to your Accountant
So, as you can see, when it comes to deciding whether or not to incorporate your company, it’s not a straight forward decision! It’s important to discuss any potential tax savings, as the answer can be different depending on other income and an individual’s circumstances. The classic line “my mate down the pub said…” is often misguided advice. Consider your situation carefully and talk to someone like On The Spot.
