In our increasingly unstable geopolitical and climatic times, you may feel deterred from taking the risk of growing or setting up a business. However, engeneering, life sciences and AI sectors are seeing a rise in demand, presenting opportunities for entrepreneurs.
It is now more important than ever to protect your investment by making sure you have considered the basic elements behind setting up or growing your business.
Consider the legal structure
Defining the structure of your business is crucial to how your business will operate. You may operate as a sole trader or under a general partnership, where less administration is required yet a higher personal liability exists. Becoming a limited partnership, a company or a limited liability partnership (LLP) means more legal formalities and administration, but could ultimately be beneficial for the growth of your business and reducing personal risk for you.
Limited partnerships, companies and LLPs must be registered at Companies House. Limited partnerships consist of different categories of partner: general and limited. Limited partners will not usually take an active role in the business and will have limited liability up to the amount of capital they have contributed. Companies are a separate legal entity and can either be limited by shares, by guarantee or be unlimited. Companies are usually limited by shares, either publicly or privately. LLPs are a hybrid form of business entity combining the benefits of a limited company with the organisational flexibility of a general partnership.
It is commonplace for the partners or shareholders to enter into an agreement to manage the business relationship and regulate the conduct of the business. These are private documents which do not have to be filed at Companies House and give you the benefit of effectively managing the operation of your business and the relationships between you and your business partners as the business grows.
It might be time to reassess the legal structure of your business, some of the reasons being:
- it could reduce your personal risk exposure – becoming a limited company will limit the liability that you as an individual would otherwise have;
- it may raise more capital – an investor might require you to create shares in the business in order for them to invest their money;
- it will enable you to share the burden and responsibilities of your business with others;
- you may be able to reward your employees by granting them options over shares (giving them the right to buy shares in the company); and
- it may allow you to react to changes in terms of the uncertain climate.
Keep effective records
Although it might seem like a fairly obvious point, keeping clear records can often be overlooked and is essential for any kind of growth. Larger businesses may be able to spend huge amounts of money maintaining organisational structures but smaller businesses do not necessarily have this luxury. Keeping clear and consistent records and statutory books will not only help you to manage your business day to day, it will also give you clear oversight of the current financial health of the business and help you to plan for the future.
Having a clear plan for the future and records that accurately reflect the financial health of your business will be attractive to investors and finance providers, and will be crucial if you look to sell your business in future.
Consider your finances
There is an array of different types of business loans which might suit your growing business. It is key that you weigh up the merits of each of the financial options your business has to ensure you have the best prospects of succeeding.
A private limited company can issue shares in return for an investment (known as ‘share capital’). The capital invested is not repaid and instead the investor becomes a shareholder in the company and can then draw dividends from the company’s profits. It is worth noting that issuing shares will reduce the control that you or your other shareholders have in the company. The advantages of share capital are:
- you can gain shareholder expertise- the investor will have a vested interest in seeing your business succeed and may have a certain skillset or level of knowledge to bring to the table;
- there is the added flexibility of being able to decide how many shares you wish to sell and the timing of the sale; and
- share capital can be used as you please with no fixed repayment requirements – If you were to take out a business loan, creditors will often stipulate what the money is used for.
To issue shares, there are certain formalities which must be met at Companies House and it will have to be in line with the company’s articles of association and any existing shareholders’ agreement, as well as the Companies Act.
Find out further how our Corporate specialists can assist your business here.