Chapter Eleven: Company Status

A major error that people usually make when beginning a new business is to spend great amounts of money in forming a limited company. A limited company has its pros as well as its cons, but there is no rule which states that you should have only a limited company. This is simply one of three choices available to you; the remaining two being Sole Trader and a Partnership.

Sole Trader

You are not required to do anything to form a sole trader. It’s just you, alone, operating as a sole trader. No legal formalities to begin your business, no one that you are answerable to (other than the Revenue Services and tax-man), and none to take a part of your profit away. If you are not already employed by another person who is footing the cost of your National Insurance stamp, you will need to announce yourself as being self-employed and purchase the stamp yourself.

Although you can do business with your personal name, it is advisable to come up with a proper business name, which indicates what exactly it is that you do. I call one company of mine ‘Baker-S-Treat’ (a confectionery business), for which I have a logo of a Sherlock Holmes chef. Cute, isn’t it??? And it is effective too. You can name your company ‘John Doe Inventions’, or perhaps ‘John Doe Unusual Items’, or simply ‘Unusual Items’. You just need to ensure that you don’t pick a name which is currently being used by a bigger organisation. If you do, the other company is sure not to appreciate it and may even start legal proceedings to stop you from utilising their name. Under the law, this is termed as ‘passing off’ because it is seen as though you are attempting to pass off your business as the other bigger business.

Starting off as a sole trader is the easiest, quickest, and most cost effective status for a new business. If you want, you could alter your business status anytime you wanted; just make sure you consult your accountant prior to doing anything of the sort.

As a sole trader, you are not required to register your accounts in any public place, thus your financial status can be kept under wraps (other than giving a record to the Revenue Services, of course.)

Partnership

Although you are not required to do anything official to start business as a partnership, it is best to do so as a precaution. In the eyes of the law, a partnership comprises two or more people who are ‘trading in common’. Thus, if you carry on your business with another person, or more than just one person, and all of you get earnings or profits from the trading, you are working as a partnership.

The benefits of a partnership are that you have someone to share the workload with and can thus take some time off when you need it, without stressing about work while you’re gone. And if your spouse was to be a partner too, there could be some tax benefits as well.

A partnership has two main drawbacks. In a partnership, you have what is termed ‘joint and several liability’, which essentially indicates that every partner in the business is individually responsible for clearing any debts that the partnership may have. What this means is that even if you have only a 50% stake in the partnership, you are still liable to pay off 100% of any debts, in case the person holding the other 50% is unable to contribute anything. And to make the situation even grimmer, you may even have liability that extends to the personal (non-partnership) debts of your partner.

However, most of this can be circumvented by having an official partnership deed drawn up by your advocate. The partnership deed typically includes:

  • Entire names and addresses of each and every partner.
  • The complete official name of the partnership and its registered address; as well as the name under which you are doing business (if this differs from the first)
  • The exact date on which the partnership was created.
  • Precise duties of all partners. For instance, someone is involved in the sales process, another handles the administrative work etc.
  • Who is responsible for taking decisions? Here you can mention that a particular partner is the managing partner and will take all decisions; or that every partner has the liberty to make the required choices.
  • Who has the financial control? Here you need to state who will be the signing authority for the cheques. Ideally you should have all the partners as signatories but if you have many partners you can choose to designate this control to one or a few.
  • The profit sharing ratio – which can be equal or whatever the partners decide.
  • What will become of any partner’s share in the business in the event of their death or other incapacitation? If this clause is not included, you may just come across a situation where one of your partners is an estate executor!
  • The signatures of each and every partner along with the date of signing. This is usually done in the presence of some witnesses.

It is quite common to have a ‘passive partner’ or a ‘sleeping partner’. Such a partner gives some money for the partnership, in return for which he gets some share in the profits, but the partner is not involved in the daily managing of the partnership.

Another drawback with a partnership is that of human nature. In the business world, stories abound about how partnerships can go bust. Partners purchase stuff using the money from the business, but pocket the sale proceeds instead of putting it back into the business. Sometimes partners also utilise partnership money to buy things that are needed for their private work. This is defended with the excuse, “But, half the money is mine as it is”. There are also times when a partner will just relax and wait for his share of the profits, without doing any work and letting the other partners slog their behinds. The lesson to be learnt from all this is that you should get into a partnership only with such a person who you can trust completely and thoroughly, who will do his share of the work, and who will not rob you blind.

A Limited Company

The major benefit with a limited company is that you (the directors) will not be held individually liable for the outstanding amounts of the company in case the company goes bust, so long as bank loans are not part of the debts. Even though the thinking goes that acquiring funds is easier as a limited company, this is false as far as banks go. Banks are not that gullible, and even if they give a loan or agree to an overdraft facility for a limited company, they will require it to be secured with a personal guarantee from the directors, which comes right back at you.

However, conducting business with the status of a limited company does communicate a degree of propriety. There are also a few tax benefits; one such being the sum of money that can be put into a ‘Directors Pension Fund’. With a limited company, you need not even be scared of the VAT man, as your company is a separate body and has its individual VAT rules and regulations.

The drawbacks with a limited company are: having to register your accounts and miscellaneous company data at the Companies House each year, and also the need to get your books formally audited by a CA. Your company letterhead also needs to carry some legal information. Doing all this entails a considerable expense, and if you do not follow the rules, there are fines to be paid as well.

If you choose to go the limited company route, consult with your accountant about the best possible timing to do so. However, you should not ask your accountant or your advocate to actually do all that is required to form the limited company. You will be charged on a per hour basis, which will ultimately end up costing you a pretty package; when all you have to do is purchase a ready-made company through any professional registration agents. You will literally be purchasing your company off-the-rack and will have to pay only around 100 pounds. After that, you simply carry out the process of altering the directors’ and shareholders’ names and addresses, and also the company name if you so desire. Your ready made company pack will contain all the relevant forms.

However, there are a few rules regarding the names. For instance, you cannot make use of the word ‘Royal’ in the company name, and you cannot utilise any name that is currently being used. The best way to go would be to keep a name that combines the personal name of a director (could be you), your area of business, and some sign of what your business is about. This would go something like this, ‘John Doe Inventions of Worcestershire Limited’. Or, if you wanted, you can simply use the name that was included in the pack and just add to it, ‘doing business as John Doe Inventions’.

Here’s a summary of your plan of action:

  • Think before you choose to form a Limited Company.
  • Only form a Partnership if you are completely sure that your partners are trustworthy.
  • Settle on a trading status for your business only after consulting your accountant.

Chapter Twelve: Fundamental Management and Documentation Keeping

The royalty business does not involve large amounts of paperwork and documentation, but it does entail some. And whatever papers you generate, it is important to do it in a systematic manner and also store the resulting papers properly. Your actual administration will obviously depend on you, but here are some useful suggestions from my end.

Office Supplies

You will not require a lot of supplies at the start. In fact, used cardboard cartons can easily be used in place of a costlier filing cabinet. However, some things that you will need to get are:

  • Something for typing. This can be an old typewriter or even your personal computer. If you cannot have one at all times, you should at least have access to one, as it is important that all written correspondence be typed.
  • A phone line.
  • Fax device or access to one.
  • Printer or access to one.
  • Company letterhead and visiting cards.
  • A large notebook in place of a costly personal planner, so as to keep an account of telephone calls and other miscellaneous things.

Once your business has picked up a little, you can invest some money to buy all this equipment rather than paying someone to utilise theirs. When you can, you should look to purchase a computer, which has word-processing software, cash flow generating, some accounting software, and a planner. The benefits with such computerised systems is that they can be used to plan and record things for years later, so that you can be reminded when any important agreements and contracts are coming up for renewal. And if you purchase a computer that has a modem, you will also be able to get onto the Wonderful World of the Internet. Although I do find this to be critical to my business, it is definitely not vital for everyone’s.

Another piece of equipment that you should consider buying is a fireproof vault for your important documents and contracts. At the start of your business, you can request your bank to safeguard these for you, but you will have to pay a considerable fee.

Important Papers and Books

At the minimum, you should do the following:

  • Have some basic books of accounts for organising your finances.
  • Make written lists of any good ideas that occur to you and keep the lists safe.
  • Make lists of prospective clients and any other useful people you come in contact with.
  • Make copies of all written correspondence and keep such copies.
  • Maintain a record of your phone calls in a large book.

Duration for which documents should be saved:

Accounting papers: things such as payment receipts, invoices, bank slips, bank statements, credit card notifications etc should not be thrown away for at least seven years. (Because the Revenue Services can check your accounts from so far back). Any letters from or to the Revenue Services and filed returns should preferably be kept forever.

All the original contracts with your manufacturers and distributors should be kept for a minimum of seven years even after the business arrangement has been terminated. If any problem arises, legal recourse is available only for seven years, which is why you should keep such contracts for that time. All Diaries and books should also be kept for a minimum of seven years even after the business arrangement has been terminated with all parties.

Letters, faxes, and other correspondence papers are generally kept for an indefinite period, but to be practical, you should keep the correspondence for at least the last seven years on hand. It is best to save copies of hostile correspondence forever. If your correspondence papers become too many, you can have them transferred to micro film.

Catalogues, manufacturer’s price sheets, brochures, samples, trade journals etc should be kept for as long as you deem necessary.

Here’s a summary of your plan of action:

  • Print some nice letterheads and visiting cards.
  • Organise a convenient and uncomplicated filing arrangement.
  • Purchase a vault or keep your contracts at the bank vault.
  • Inculcate the routine of taking down notes of telephone conversations.
  • Save important documents and papers for at least seven years.

Dictionary of Terms:

  • Contracts: These are the official papers to safeguard your interests. Other names for contracts include agreements, deeds, and licences.
  • Transferring (assigning): The process of officially giving your rights to someone else.
  • Commercial Department or Attache: The unit in a nation’s embassy which is in charge of supporting trade between their nation and the UK.
  • Electronic mail: Written messages sent via computers.
  • Exclusive (sole) right: Having the right for a particular thing which no one else has.
  • Expenses: Costs incurred in your daily business activities.
  • Income (Earnings): Whatever money enters your business resulting from your business dealings.
  • Manufacturer (Supplier, Principal): The producer of the goods you are interested in.
  • Patent: Having the legal right to use or sell a particular item, which no one else has for that same item.
  • Profit: Whatever money remains after deducting all your expenses from your earnings.
  • Registered address: The place where the official headquarters of a Limited Company are located.
  • Reservations: This is a lawful term, which indicates everything that anybody ‘reserves the right’ to do.
  • Royalty: The money that you are given for passing your rights.
  • Tax assessment: The decision of the Revenue Service about how much tax you owe them. An estimated assessment refers to an educated ‘guess’ about the tax due in case you have not filed a tax return.
  • Trade Journal: a magazine or publication intended for those doing a certain kind of business.
  • Trading address: The location that you work out off.
  • Turnover: All the money that comes into your business in any one year.
  • Feasible (Viable): Some business idea that has promise and will return a profit.

Appendix:

Here are the contracts that I utilise. These can be altered for your own use by changing the terms and words where shown. Please do have your advocate take a look at these contracts prior to using them.

The contracts given here can be utilised with the writer’s consent, but should neither be copied (partly or fully) nor sold to anyone else without explicit written authorization. The contracts here are meant to only be samples, and under no circumstances should the writers or the printers be held liable for any mistakes in the contracts. The writers will not cover any claims, which may arise from utilising these contracts.

Chapter Eleven: Company Status

A major error that people usually make when beginning a new business is to spend great amounts of money in forming a limited company. A limited company has its pros as well as its cons, but there is no rule which states that you should have only a limited company. This is simply one of three choices available to you; the remaining two being Sole Trader and a Partnership.

Sole Trader

You are not required to do anything to form a sole trader. It’s just you, alone, operating as a sole trader. No legal formalities to begin your business, no one that you are answerable to (other than the Revenue Services and tax-man), and none to take a part of your profit away. If you are not already employed by another person who is footing the cost of your National Insurance stamp, you will need to announce yourself as being self-employed and purchase the stamp yourself.

Although you can do business with your personal name, it is advisable to come up with a proper business name, which indicates what exactly it is that you do. I call one company of mine ‘Baker-S-Treat’ (a confectionery business), for which I have a logo of a Sherlock Holmes chef. Cute, isn’t it??? And it is effective too. You can name your company ‘John Doe Inventions’, or perhaps ‘John Doe Unusual Items’, or simply ‘Unusual Items’. You just need to ensure that you don’t pick a name which is currently being used by a bigger organisation. If you do, the other company is sure not to appreciate it and may even start legal proceedings to stop you from utilising their name. Under the law, this is termed as ‘passing off’ because it is seen as though you are attempting to pass off your business as the other bigger business.

Starting off as a sole trader is the easiest, quickest, and most cost effective status for a new business. If you want, you could alter your business status anytime you wanted; just make sure you consult your accountant prior to doing anything of the sort.

As a sole trader, you are not required to register your accounts in any public place, thus your financial status can be kept under wraps (other than giving a record to the Revenue Services, of course.)

Partnership

Although you are not required to do anything official to start business as a partnership, it is best to do so as a precaution. In the eyes of the law, a partnership comprises two or more people who are ‘trading in common’. Thus, if you carry on your business with another person, or more than just one person, and all of you get earnings or profits from the trading, you are working as a partnership.

The benefits of a partnership are that you have someone to share the workload with and can thus take some time off when you need it, without stressing about work while you’re gone. And if your spouse was to be a partner too, there could be some tax benefits as well.

A partnership has two main drawbacks. In a partnership, you have what is termed ‘joint and several liability’, which essentially indicates that every partner in the business is individually responsible for clearing any debts that the partnership may have. What this means is that even if you have only a 50% stake in the partnership, you are still liable to pay off 100% of any debts, in case the person holding the other 50% is unable to contribute anything. And to make the situation even grimmer, you may even have liability that extends to the personal (non-partnership) debts of your partner.

However, most of this can be circumvented by having an official partnership deed drawn up by your advocate. The partnership deed typically includes:

  • Entire names and addresses of each and every partner.
  • The complete official name of the partnership and its registered address; as well as the name under which you are doing business (if this differs from the first)
  • The exact date on which the partnership was created.
  • Precise duties of all partners. For instance, someone is involved in the sales process, another handles the administrative work etc.
  • Who is responsible for taking decisions? Here you can mention that a particular partner is the managing partner and will take all decisions; or that every partner has the liberty to make the required choices.
  • Who has the financial control? Here you need to state who will be the signing authority for the cheques. Ideally you should have all the partners as signatories but if you have many partners you can choose to designate this control to one or a few.
  • The profit sharing ratio – which can be equal or whatever the partners decide.
  • What will become of any partner’s share in the business in the event of their death or other incapacitation? If this clause is not included, you may just come across a situation where one of your partners is an estate executor!
  • The signatures of each and every partner along with the date of signing. This is usually done in the presence of some witnesses.

It is quite common to have a ‘passive partner’ or a ‘sleeping partner’. Such a partner gives some money for the partnership, in return for which he gets some share in the profits, but the partner is not involved in the daily managing of the partnership.

Another drawback with a partnership is that of human nature. In the business world, stories abound about how partnerships can go bust. Partners purchase stuff using the money from the business, but pocket the sale proceeds instead of putting it back into the business. Sometimes partners also utilise partnership money to buy things that are needed for their private work. This is defended with the excuse, “But, half the money is mine as it is”. There are also times when a partner will just relax and wait for his share of the profits, without doing any work and letting the other partners slog their behinds. The lesson to be learnt from all this is that you should get into a partnership only with such a person who you can trust completely and thoroughly, who will do his share of the work, and who will not rob you blind.

A Limited Company

The major benefit with a limited company is that you (the directors) will not be held individually liable for the outstanding amounts of the company in case the company goes bust, so long as bank loans are not part of the debts. Even though the thinking goes that acquiring funds is easier as a limited company, this is false as far as banks go. Banks are not that gullible, and even if they give a loan or agree to an overdraft facility for a limited company, they will require it to be secured with a personal guarantee from the directors, which comes right back at you.

However, conducting business with the status of a limited company does communicate a degree of propriety. There are also a few tax benefits; one such being the sum of money that can be put into a ‘Directors Pension Fund’. With a limited company, you need not even be scared of the VAT man, as your company is a separate body and has its individual VAT rules and regulations.

The drawbacks with a limited company are: having to register your accounts and miscellaneous company data at the Companies House each year, and also the need to get your books formally audited by a CA. Your company letterhead also needs to carry some legal information. Doing all this entails a considerable expense, and if you do not follow the rules, there are fines to be paid as well.

If you choose to go the limited company route, consult with your accountant about the best possible timing to do so. However, you should not ask your accountant or your advocate to actually do all that is required to form the limited company. You will be charged on a per hour basis, which will ultimately end up costing you a pretty package; when all you have to do is purchase a ready-made company through any professional registration agents. You will literally be purchasing your company off-the-rack and will have to pay only around 100 pounds. After that, you simply carry out the process of altering the directors’ and shareholders’ names and addresses, and also the company name if you so desire. Your ready made company pack will contain all the relevant forms.

However, there are a few rules regarding the names. For instance, you cannot make use of the word ‘Royal’ in the company name, and you cannot utilise any name that is currently being used. The best way to go would be to keep a name that combines the personal name of a director (could be you), your area of business, and some sign of what your business is about. This would go something like this, ‘John Doe Inventions of Worcestershire Limited’. Or, if you wanted, you can simply use the name that was included in the pack and just add to it, ‘doing business as John Doe Inventions’.

Here’s a summary of your plan of action:

  • Think before you choose to form a Limited Company.
  • Only form a Partnership if you are completely sure that your partners are trustworthy.
  • Settle on a trading status for your business only after consulting your accountant.

Chapter Twelve: Fundamental Management and Documentation Keeping

The royalty business does not involve large amounts of paperwork and documentation, but it does entail some. And whatever papers you generate, it is important to do it in a systematic manner and also store the resulting papers properly. Your actual administration will obviously depend on you, but here are some useful suggestions from my end.

Office Supplies

You will not require a lot of supplies at the start. In fact, used cardboard cartons can easily be used in place of a costlier filing cabinet. However, some things that you will need to get are:

  • Something for typing. This can be an old typewriter or even your personal computer. If you cannot have one at all times, you should at least have access to one, as it is important that all written correspondence be typed.
  • A phone line.
  • Fax device or access to one.
  • Printer or access to one.
  • Company letterhead and visiting cards.
  • A large notebook in place of a costly personal planner, so as to keep an account of telephone calls and other miscellaneous things.

Once your business has picked up a little, you can invest some money to buy all this equipment rather than paying someone to utilise theirs. When you can, you should look to purchase a computer, which has word-processing software, cash flow generating, some accounting software, and a planner. The benefits with such computerised systems is that they can be used to plan and record things for years later, so that you can be reminded when any important agreements and contracts are coming up for renewal. And if you purchase a computer that has a modem, you will also be able to get onto the Wonderful World of the Internet. Although I do find this to be critical to my business, it is definitely not vital for everyone’s.

Another piece of equipment that you should consider buying is a fireproof vault for your important documents and contracts. At the start of your business, you can request your bank to safeguard these for you, but you will have to pay a considerable fee.

Important Papers and Books

At the minimum, you should do the following:

  • Have some basic books of accounts for organising your finances.
  • Make written lists of any good ideas that occur to you and keep the lists safe.
  • Make lists of prospective clients and any other useful people you come in contact with.
  • Make copies of all written correspondence and keep such copies.
  • Maintain a record of your phone calls in a large book.

Duration for which documents should be saved:

Accounting papers: things such as payment receipts, invoices, bank slips, bank statements, credit card notifications etc should not be thrown away for at least seven years. (Because the Revenue Services can check your accounts from so far back). Any letters from or to the Revenue Services and filed returns should preferably be kept forever.

All the original contracts with your manufacturers and distributors should be kept for a minimum of seven years even after the business arrangement has been terminated. If any problem arises, legal recourse is available only for seven years, which is why you should keep such contracts for that time. All Diaries and books should also be kept for a minimum of seven years even after the business arrangement has been terminated with all parties.

Letters, faxes, and other correspondence papers are generally kept for an indefinite period, but to be practical, you should keep the correspondence for at least the last seven years on hand. It is best to save copies of hostile correspondence forever. If your correspondence papers become too many, you can have them transferred to micro film.

Catalogues, manufacturer’s price sheets, brochures, samples, trade journals etc should be kept for as long as you deem necessary.

Here’s a summary of your plan of action:

  • Print some nice letterheads and visiting cards.
  • Organise a convenient and uncomplicated filing arrangement.
  • Purchase a vault or keep your contracts at the bank vault.
  • Inculcate the routine of taking down notes of telephone conversations.
  • Save important documents and papers for at least seven years.

Dictionary of Terms:

  • Contracts: These are the official papers to safeguard your interests. Other names for contracts include agreements, deeds, and licences.
  • Transferring (assigning): The process of officially giving your rights to someone else.
  • Commercial Department or Attache: The unit in a nation’s embassy which is in charge of supporting trade between their nation and the UK.
  • Electronic mail: Written messages sent via computers.
  • Exclusive (sole) right: Having the right for a particular thing which no one else has.
  • Expenses: Costs incurred in your daily business activities.
  • Income (Earnings): Whatever money enters your business resulting from your business dealings.
  • Manufacturer (Supplier, Principal): The producer of the goods you are interested in.
  • Patent: Having the legal right to use or sell a particular item, which no one else has for that same item.
  • Profit: Whatever money remains after deducting all your expenses from your earnings.
  • Registered address: The place where the official headquarters of a Limited Company are located.
  • Reservations: This is a lawful term, which indicates everything that anybody ‘reserves the right’ to do.
  • Royalty: The money that you are given for passing your rights.
  • Tax assessment: The decision of the Revenue Service about how much tax you owe them. An estimated assessment refers to an educated ‘guess’ about the tax due in case you have not filed a tax return.
  • Trade Journal: a magazine or publication intended for those doing a certain kind of business.
  • Trading address: The location that you work out off.
  • Turnover: All the money that comes into your business in any one year.
  • Feasible (Viable): Some business idea that has promise and will return a profit.

Appendix:

Here are the contracts that I utilise. These can be altered for your own use by changing the terms and words where shown. Please do have your advocate take a look at these contracts prior to using them.

The contracts given here can be utilised with the writer’s consent, but should neither be copied (partly or fully) nor sold to anyone else without explicit written authorization. The contracts here are meant to only be samples, and under no circumstances should the writers or the printers be held liable for any mistakes in the contracts. The writers will not cover any claims, which may arise from utilising these contracts.

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