Organising the start while planning for the future

Current global market in themselves contains a rich diversity of commercial organisations in size and aim. Whenever we think of a firm, generally we would inquire if the business is a small or a larger one, although there is a wide variety of businesses that operate in between these two extremes. Independent of the size and type of business their existence would be subject to a set of legal regulations in a given form which originates based on their legal definition. How a firm starts its existence, whatever the nature or their scale of operation, will have consequences in their daily activities with their requirements, as well as if meantime entity needs to undergo certain changes as result of continuation or termination of its business activity. Therefore, the choice of legal structure has important implications. Among the factors which the founder has to consider when deciding on the legal form of business to establish are:

·        the level of risk against personal;

·        the costs of establishing the business;

·        the legal requirements related to the preparation and supply of information for public interest;

·        the taxation position;

·        commercial needs, access to the variety of capital available in the market;

·        business continuity/termination.

These set of points mentioned above are only a standard template. Which one of them is to be prioritised over the other depends on the specific business and its founder. This is not limited just to the type of business in terms of industry. Moreover, it specifically has to do with how it will operate on the day-to-day basis, and what relationship it will have with its stakeholders. One of the key benefits of starting on a self-employed (sole trader) form is simplicity or cheap, sometimes free of charge, set up. On the other hand, option of having the business incorporated (Limited Liability in UK) is protection that the founder will have against its personal assets. In my opinion these are two extremes of the same subject. On the first case costs are kept at minimum, whereas on the other one risk is minimised. A typical case of cost and benefit weighing. However, cost and benefit does not come as some sort of a set package solution; it does not mean that just because one is parting with some capital automatically will enjoy equivalent value in risk minimisation. How much is to be saved and how much benefit is to be reaped it will depend on individual business specifics.

For example, if a business operates in a such a way where as part of its activity the owner will buy some sort of insurance policy against eventual losses, the amount saved on business set-up and maintenance operating as sole-trader will possibly be meaningless. Or if it will employ a number of people who will eventually work and make decisions themselves. At the same time a business which is expected to pay for its supplies cash on delivery it will not gain any benefit from limited liability protection, because practically it will not have any liabilities(debts). Trying to visualise it, it should look like a curve going up for the risk in case of the business failure. How far up it will go in value and where is the point of the owner being able to sustain such losses? If the worst case scenario is within an acceptable range maybe starting for free and easy as a sole-trader without any protection against is the best way. However, if in the worst case potential losses will be so severe that will endanger the livelihood of the founder and their loved ones no risk should be taken with the cheapest option. Let’s not forget that majority of start-ups businesses fail within six months. Being able to continue to the next challenge with the lesson learned from the previous failed attempt is equally important. Practice tells us for every success there are many failures.

Attempting to give advice for the many is risking being too broad. At the same time, being too specific is risking not be applicable in most cases. In my opinion, the best approach for the would-be entrepreneurs is to contact or discuss the plan of the business with someone with substantial degree of knowledge in the subject. It seems that time and time again we come to this point that small business owners should discuss their ideas with a wide number of people without fearing for some sort of adverse effects.

Another approach would be to raise a number of questions linked to some specific situation hoping that it will provide with an approximation to a given scenario as it arises. For example, in the case of an owner of a life style business, someone who is more concerned with the psychology of being own boss rather than having to attend to the business actively it would wise if the business is incorporated.

Without going into details with various forms of incorporating a business, Limited Liability in UK, an important feature is the separation of the business from the owner; giving a legal identity to the business. Incorporating the business automatically ensures continuation beyond the lifespan of the owner founder and the possibility for the business to change ownership without any effect to the activity it is engaged.

As further away from the sole-trader form more costs are incurred. With the simple cost-benefit principle in mind, the more costs are incurred the more benefits are expected to be sustained. One of them is the possibility to invest and raise finance more easily, as is the greater possibility to reduce amount of taxes payable. Businesses with legal identity are able to invest in other businesses independently from the owner and therefore explore more opportunities for expansion and growth.

1 share x $1=100 shares x 1 cent

From my experience with many small business owners it has come to my attention a tendency of setting a business with one share capital. My advice will always be to try and avoid as many administrative procedures from the very start! One share with a book value of $1 is equal to 100 shares of 1cent each; there is still only $1 capital. Having 100 shares instead of 1, declared (or even 10,000 shares at 1cent each) will avoid a lot of administrative procedures in case any time in the future business is to expand with additional shareholders in a variety of forms.

In any case, the old age maxim of ‘hoping for the best and preparing for the worst’ seems to be the best practice! Set the business in that way the it will enable you to learn the lesson and close the chapter in the cheapest and simplest form possible so that you can move on unto new challenge and do better.