Starting a technology business   the basics
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Ted Dewhurst workshop

Ted Dewhurst workshop

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Starting a technology business the basics Document Transcript

  • 1. STARTING A TECHNOLOGY BUSINESS – A BRIEF GUIDEDo I need a company?It is not essential to set up a company when you start in business. If you intend to run the business by yourself you could set up as a “sole trader”. However, there are a number of practical and tax advantages in operatingthrough a limited company, and if you’re going into business with other people, a company really is essential.How do I set up a company, and what are the costs?Setting up a limited company is very simple; there are many company formation agents advertising on the webwho will incorporate a company for under £30. Alternatively you can do it yourself by following the guidance onthe Companies House website (www.companieshouse.gov.uk); there is a filing fee of £14 for online applications.How do I choose a company name?There are some restrictions on using company names. You cannot choose a name that is already in use, or is so similar toanother existing name as to cause confusion. There are also restrictions on using certain kinds of words in the name if theyimply that the company is a certain kind of business or has a certain status; a searchable database of existing names andguidance on choosing names can be found on the Companies House website. It is worth bearing in mind that a companycan trade using a name which is not the name of the company - this is called a “business name”.When choosing a company name or a business name it is very important to ensure that no other business is using it andthat it doesn’t infringe someone else’s intellectual property rights. It’s a good idea to check the register of trade marks at theUK Intellectual Property Office (www.ipo.gov.uk) and also to do some web searches to check that your chosen name is notprotected or being used by someone else.What are “articles of association”?These are the general rules which govern the running of the company. If you wish, the company can adopt the “modelarticles” which is a standard set of articles created by legislation; these can be found on the Companies House website.Alternatively you can have your own bespoke set of articles (which could be based on the model articles), but you will needa solicitor to help you prepare these. It is possible to change the company’s articles at any time.Isn’t there lots of administration involved in running a company?Not really. Once the company is set up, the directors will need to file an annual return at Companies House to notify anychanges during the year (there is filing fee of £14 if you do this online). You also need to inform Companies House usingspecial forms each time the company does certain things such as issuing shares or changing directors, but all the forms areavailable on the Companies House website and there are no fees for most filings. A company must prepare and fileaccounts every year, and if it has been trading you will generally need an accountant to help you prepare them. Everycompany must also keep, and keep updated a set of “statutory books” which often take the form of a loose-leaf binder andwhich contain details of the company’s shareholders and directors, amongst other things. A binder containing the requiredpre-printed registers and blank share certificates can be bought online for about £30.Directors and shareholdersEvery limited company must have one or more directors (who together manage the day to day running of the business), andone or more shareholders (who collectively own the business). The directors and shareholders may or may not be the samepeople. Directors and shareholders have different sorts of powers and rights in relation to the company; directors also owea number of duties to the company, most of which are set out in the Companies Act 2006.Do I need a shareholders’ agreement?Where a company has more than one shareholder it is worth thinking about putting in place a shareholders’ agreement.This is an agreement between some or all of the shareholders which can cover many things including, for example: who can appoint directors what things (if any) require the consent of the shareholders whether shareholders can sell their shares and to whom what happens to someone’s shares if they leave the companyShareholders’ agreements are extremely versatile and can cover anything which shareholders can legally agree betweenthemselves. Thought needs to be given as to how any shareholders’ agreement will work with the articles of association ofthe company. It is generally a good idea to get a solicitor to help you prepare a shareholders’ agreement.How does the company raise funds?Most companies are not profitable at the outset, and require finance to develop the business to the point where it cansupport itself. There are a number of sources of finance for companies e.g. friends and family, business angels and venturecapital institutions. Of course banks are also a potential source of finance, but banks are generally unwilling to lend to early-stage private companies. If you or anyone else puts money in to the company then this can either be treated as a loan (withthe associated expectation of repayment at some point), or as a subscription for shares (an “equity investment”). An equityinvestment in a private company should be regarded as a long-term investment, as there is no market for the shares andshareholders will not usually receive any return until the company is sold or is floated on a stock exchange.
  • 2. Shares and share optionsCompanies are able to reward employees or consultants with shares or share options, and this is a very useful capabilitywhen the company has limited funds. Share options are particularly flexible; they represent a right to purchase shares in thefuture, which can be made subject to various terms and conditions. For example, options can be structured so that they“vest” over a number of years, and lapse or be cancelled in certain circumstances e.g. if the option holder leaves thecompany. When an option holder exercises their options (which usually involves making a payment to the company) theoptions are converted into shares, at which point the option holder become a shareholder. The grant and exercise of shareoptions has tax consequences, and companies and prospective option holders should seek tax advice.Do I need to do anything to protect my intellectual property?This depends to some extent on the nature of the business and the sort of intellectual property (“IP”) being used in thebusiness. Some IP can be registered (e.g. patents and trade marks) whereas e.g. written material is automatically protectedby copyright without the need for registration. Generally all IP which is unique and valuable to the business that can beregistered should be; you should consult a patent attorney or a specialist solicitor to advise you on this. Details of anyinventions which are patentable must be kept secret until they are registered or else the patent application may fail.As a general rule, all IP (including domain names) should be registered in the name of the company rather than thefounders, and if the company raises outside investment in the future this is something that experienced investors will insiston. You should take care to ensure that any IP being generated by anyone working for the business belongs to thecompany. IP created by employees of the company during the course of their employment will automatically belong to thecompany, but this is not true for anyone else – so consultants or anyone working in a similar capacity must always be askedto sign an agreement confirming that all IP developed by them will belong to the company, and that they will not disclose thecompany’s confidential information.Do there need to be contracts between the company and the people who work for it?Anyone else who works for the company will typically either be an employee (which entitles them to certain legal rights) or aconsultant. An employment contract automatically comes into existence between a company and an employee when thatemployee starts work (the contract need not be in writing). Founders of businesses (who are usually employees) often donot have written employment contracts, though it is good practice to put written contracts in place. It is important forconsultants or anyone who is not an employee to have a contract for services (e.g. a consultancy agreement) with thecompany. Take care in relation to anyone who is engaged by the company on a consultancy basis: if the arrangements aresimilar in nature to an employer/employee relationship, the law may simply treat the contractor as an employee, which willhave tax and other consequences.Will the company have to pay tax?Once the company is incorporated the company will automatically receive a notice from HM Revenue & Customs requestingit to register for corporation tax. Companies pay corporation tax on their profits, so until the company starts making profits itwill have no tax to pay. However, the company may have to pay other kinds of tax. If the company has any employees whoreceive a salary above a certain level, it will be required to withhold and make tax payments on their behalf and also payemployer’s national insurance contributions. Once the company’s turnover exceeds a certain threshold (currently £73,000 ina period of 12 months) it will need to register for and start accounting for VAT. A shareholder in the business will have topay income tax on any dividends it receives from the company.Are there any other rules and regulations I should know about?Some laws and regulations will be relevant irrespective of what kind of business you are running (e.g. data protection rules,employment laws), but on the whole private limited companies are fairly lightly regulated, and apart from the ruleshighlighted in this document there is not much that founders of new businesses need to concern themselves with. Clearlymanagers of businesses operating in more heavily regulated sectors (such as financial services, gambling, consumerservices or businesses with an environmental impact) will need to ensure they comply with the relevant legislation.Where can I get further information?The Companies House website (www.companieshouse.gov.uk) contains guidance on incorporating and running a company,and the Business Link website (www.businesslink.gov.uk) provides lots of general advice on setting up in business.About the authorTed Dewhurst is the founder and principal of Kesteven. He is an experienced company and commercial solicitor with aLondon city background, and has also worked in-house at Accel Partners and Balderton Capital (formerly BenchmarkEurope) – two of Europe’s leading venture capital firms. For further information on any of the issues raised by this noteplease contact Ted by email at ted@kestevenlaw.com or on (01223) 208855.DisclaimerThe contents of this note are not, and should not be treated as, a substitute for professional advice. Detailed specialistadvice should be obtained before taking or refraining from any action as a result of the comments made in this note,which are only intended as a brief introduction to starting a business. This information is correct as at 23 November 2011. ©Kesteven Law Limited v1 23.11.11