Legal and Financial Structures of Business

Legal And Financial Structures Of Businesses

A great business idea, the thought of making money can often carry you away on a wave of euphoria. A catchy business name that people will remember. A product or service that people will enjoy and recommend to friends and colleagues. Business premises, whether an office, shopfront or factory. It's all positive and exciting, like a business should be. However, what if things go wrong?

This article aims to help you prepare by getting the best legal business structures in place. Most business owners have yet to consider how they will exit the business, whether it is successful and they want to sell, or if things go wrong and they need to limit the damage to their finances.

What's your exit plan? Always start with the end in mind!

The content is based on UK law; most countries and jurisdictions follow the same structures but often use different terminology. Fortunately, the legal principles are the same in most parts of the world.

Personal & Non-Personal Liability

The business will be successful, and the owner will earn a good living, allowing them to sell the business when they choose. But what if things go wrong, and the company has debts for whatever reason? Who is going to pay?

The legal structure of the business determines who or what is liable.

You can trade yourself as an individual or as a separate legal entity. Let's have a look at the basic structures. Before starting your journey, it is recommended that you consult a professional Accountant or Solicitor. What follows is for educational purposes only.

Sole Trader (Self-Employed)

A sole trader is legally responsible for any losses or liabilities. So if you or any of your employees or agents do anything wrong, you are liable to the extent of your wealth.

Partnership

As a partner in a business, you are liable personally to the extent of your wealth if any of your partners, employees or agents do anything wrong.

Limited Liability Partnership (LLP)

An LLP is a separate legal entity; it's not you. The liability of the partners is limited to the amount of capital they have invested. If the business fails for any reason, only the assets owned by the LLP will be used to meet the liabilities. However, if the partners have broken the law, they may be personally liable in any criminal proceedings.

Limited Company (Ltd)

A limited company, like the LLP, is a separate legal entity. The liability is limited to the amount of money invested by the shareholders. However, if the directors have broken the law, they may be personally liable in any criminal proceedings.

Power Of Attorney

What happens if you or one of your co-directors or partners is ill and unable to work?

Due to privacy laws, all institutions and businesses can only deal with the named account holder or the person or legal entity named on a contract.

For example, A spouse cannot access the other spouse's bank account during illness or following death. The same restrictions can apply to business assets.

Debts and contracts may not be honoured due to these restrictions.

The solution is a legal agreement called a Lasting Power Of Attorney or a Power Of Attorney (POA). POAs are powerful documents that allow one person to grant another person the authority to manage their assets. A lawyer who explains all the risks and benefits should always prepare these documents. The lawyer can establish legal safeguards.

Personal Guarantees

Providers of business services may require personal guarantees, which means that if the business is unable to pay, you will be held responsible. This practice is common for new companies and is frequently a requirement for established businesses. You should always seek professional advice before entering into these agreements, as they are familiar with property and equipment leases.

Ensure you know how long the personal guarantee will last, its term. Remove the guarantee once your business has successfully traded for a few years. Ensure that all directors and partners are co-signatories of any guarantees. Otherwise, one director or partner could find themselves solely liable! As a rule, only sign something after thoroughly reading it; if in doubt, consult a lawyer.

Contractual Scams

Companies exist to take advantage of small businesses that don't automatically have all legal documents checked by lawyers. These crooks will sell you a dream, enter you into a contract, and then fail to deliver the goods or services.

The arrangements often include an automatic renewal clause, but you're only aware of it when additional fees are due. These scams are common in service industries such as advertising. They rely on you being busy and believing the contract expires after a set term, so you don't pursue non-delivery.

Upon renewal, they use the law aggressively to force you to pay. They know you will pay because your legal fees to challenge the contract are considerably higher than paying them!

Exit Plan

Always start with the end in mind! Time flies when you run a business; many people only consider their exit when they wish to leave or if the company is in trouble.

Selling

The business may be challenging to sell if you are the owner and don't have written contracts with your customers. The customers could go elsewhere, as they only want to deal with you. Alternatively, if the business does not require your presence to perform the work and you have contracts with your customers, the company should be easier to sell.

Trouble

If you are a sole trader or a partner, you may be personally liable to the extent of your wealth. Alternatively, you are only responsible for your investment if your liability is limited unless you have broken the law.

Summary

Professional advice and planning for all potential eventualities are crucial in both business and personal life. Preparation can help you avoid pitfalls such as death, illness, legal claims, debt and contract liabilities.

When buying a house, you use a lawyer to ensure the purchase is legal; your business is just as essential.