Business Startups
Most frequently, the choice will be between setting up a private company limited by shares and operating in partnership (or as a "sole trader", in the case of a one-man business). Certain circumstances, however, will dictate that a public limited company, a private company limited by guarantee, an unlimited company or a limited partnership should be considered. The decision will be based on a combination of the following factors:
- taxation
- costs
- the importance of limited liability
- the requirement for bank borrowings
- the anticipated growth of the business
- the need for confidentiality
Points to Consider
It is important from the outset to establish the basis on which the ownership of the business will be shared. It is quite common for the participants to speak of forming a "partnership", albeit this may be through the medium of a limited company. Except where the ownership is going to be exactly 50:50, the result may not be as intended. For example, ownership of 10% of the share capital of a private limited company could represent a much smaller proportion of the value of the company and could be unrealisable. Also, two 30% minority holdings could, when aggregated, represent a controlling interest in a company. The 50:50 situation brings its own problems, of course, when it comes to resolving a deadlock!
As well as the division of the shareholdings, you should consider:-
- the rights and obligations attaching to the shares in relation to: dividends, voting, return of capital, conversion, etc
- the value of shares which are going to be transferred and the price at which any new shares will be issued
- the conditions applying to any transfer of the shares
- any other contractual considerations, such as provisions contained in a shareholders' agreement
Raising funds
A new business will generally begin with a combination of owners' funding, whether debt or equity, and bank debt. Loans may be secured or unsecured. The security may be provided from the assets of the business, other assets of the owners, or other third party assets. Shareholder loans may have to be postponed to the bank loans, to ensure that the bank has a better claim on the assets of the company. If the owners are unable to provide sufficient equity to finance the business directly or to enable it to raise any loan funding required, it may be possible to raise third party equity finance. Although some venture capital funds operate at the lower end of the market, there is a tendency for institutions to move to larger transactions, in order to maximise their return on investment. We have contacts with venture capitalists prepared to back smaller ventures as well as large ones, and have assisted numerous clients to meet their financing requirements. Click here to see an article on Venture Capital: "Closing the Equity Gap".
Management
In the case of many small business start-ups, the same individuals will be the owners and the managers. This is particularly so in the case of a traditional partnership. In a limited company, however, it is important to distinguish clearly between the role of shareholder and the position of director. Where there are one or more external investors, it is common for the relevant shareholders to have the power to appoint (and remove) individual directors, to represent their interests on the board. The directors have control of the day to day affairs of the company. It is important that the voting rights that apply within the board of directors reflect the balance of the ownership of the company. So, apart from the usual provisions for a quorum, it is common to require certain directors to be present, or even an affirmative vote by those directors, before a vaild decision can be taken. In law, the board of directors act together as a unit, although it is common for the directors to delegate day to day control to a managing director, assisted by other executive directors.