Most people starting a small business tend to start up as sole traders. This is because it is perceived to be a lot cheaper and easier to go down this route rather than to form a limited company.

All you need to do to be a sole trader is to start your business and notify HMRC that you are now self-employed. That’s it – you now have a small business!

Then what normally happens is that when a business is a couple of years old and is getting to the stage where it needs to take on contractors or employees or it is signing bigger contracts, the business owner might start to think about trading through a limited company.

However just because this is what most small business owners do, does not mean it is necessarily the right thing for your business and it is important to think hard about establishing your business on the right foundations.

So, why might you want to trade through a limited company? There are two main reasons – firstly, if you are turning over at least £30,000 per year then generally it is more tax efficient to trade through a limited company. If you want to use a calculator to check this for your business then click here.

Secondly, as the name suggests, a limited liability company gives you limited liability. If you are a sole trader and there is a claim against your business, then you are at risk of losing your personal assets – including your car and your house.  If however you trade through a limited company, it is a separate legal entity and unless you have given a personal guarantee or are doing something where directors may have personal liability, your personal assets will be protected. In the worst-case scenario where the company has insufficient assets to pay out, you would wind the company up and the creditor would still have no rights against your personal assets.

So if from day one of your business, you are going to be employing people, entering into high value supply or customer contracts or are likely to have a turnover of more than £30k in your first year, you should think carefully about whether to incorporate as a company.

Moreover, even though you are only a “small business”, you should still have an exit plan – that is, a plan to grow your business and sell it for the best price, giving you a nice return on all of your investment and hard work. If you have read the classic business book “the E-Myth” by Michael Gerber, you will know that in order to really succeed at business, you need to build a business that can operate independently of you – by putting systems and structures in place that allow you to scale the business. It is almost always better to start putting these systems and structures in place in a limited company sooner rather than later so that when you come to sell, everything is all neatly owned by the limited company ready for the sale.

Small business owners are sometimes reluctant to incorporate a limited company because of fears about the expense and the administrative obligations. This fear is often misplaced. You can now set up a limited company online very easily from as little as £4.99.  The main administrative requirements are to file accounts and to submit an Annual Return (which costs £13 if you file it online). So really the only additional expense (if you can’t do it yourself) is to hire an accountant to prepare your accounts for you but this can be done for under £100 a year and is something that you should be doing anyway if you are taking your business seriously.

One thing that a lot of small business owners don’t take into account when starting to trade through a limited company is that the company’s money is not their money. You cannot just take money willy nilly from your company’s bank account. There are only three ways you can legally take money from your company – you can pay yourself a salary, you can take dividends or you can receive repayments on your loans (e.g. if you lent the company money for its business expenses). If you take the money out any other way, you will run into tax problems so don’t do it!

Another issue that small business owners don’t like is that the accounts are public and anyone can see how well (or not) your business is doing. However not many people (i) know how to obtain the accounts or (ii) would go to the effort of obtaining the accounts, so don’t let that put you off.

Finally, if you form a limited company then you will be a director – and directors have certain legal obligations that if not fulfilled, could result in a hefty fine or, in the very worst case scenario, a prison sentence. But saying that, you have to be doing something pretty naughty to be fined or put in prison. If you want to know more about your responsibilities as a director, you can click here

If you have been trading as a sole trader and decide to transfer the business to a limited company, then depending on the assets that are to be transferred (such as copyright in a logo or other content), you may need an Asset Transfer Agreement and any ongoing contracts that have been entered into in your name as a sole trader will need to be ‘novated’ (legal term that means transferred to) to the limited company.

If you have been trading as a partnership (i.e. where there is you and other people running the business but you have not yet formed a company) and decide to trade through a limited company or you have been a sole trader and decide to bring other people into your new company, you should put in place a Shareholders Agreement that will deal with lots of important issues (such as what happens to the business if you fall out). If you are the sole shareholder in your new company, you will not need a Shareholders Agreement.

If you need any help with setting up a limited company, with an Asset Transfer Agreement or with a Shareholders Agreement, email me and I will be delighted to help you.

© Suzanne Dibble 2013

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Competitions, prize draws and Facebook…

by admin on 28 August 2013

Ok so I am a little bit addicted to Facebook. So I do see a lot of content on there. But not a day goes by without me seeing what had previously been a major breach of Facebook’s rules on competitions and prize draws. You know, the “like this page to win a macbook pro” or the “comment here to win an iPad” posts.

Now these aren’t statutory rules of course, these are just Facebook’s own contractual rules – but they actually had a more unpalatable consequence for breach than statutory rules do – yes, the loss of the Facebook page that you have grafted so hard to build, not to mention the expense of promoting your page to gain likes etc.

However, as of yesterday (27 August), all that is a thing of the past!

You no longer need to run your Facebook competitions and prize draws through a third party app. You can post them on your Facebook page and you can even ask for likes and comments as a means of entry.

Happy days!

Now Facebook wouldn’t be Facebook without having a few rules about competitions and prize draws, so you can read the latest rules here.

This is great news for small business owners who didn’t have the know-how, time or funds to mess around with third party apps.

We are now doubt going to see even more competitions and prize draws on Facebook and that is why this article is so timely – just because Facebook has relaxed its own contractual rules doesn’t mean that English law on competitions and prize draws has changed. And with potential consequences of a fine of up to £5,000 and/or imprisonment for up to 51 weeks, this really is an area that you need to be aware of and comply with.

So what is the law on competitions and prize draws?

Here in the UK, the Gambling Act 2005 makes it a criminal offence to run an illegal lottery – and that is what you will be doing if you require payment for entry into a prize draw or sweepstake. Now you really don’t want to be caught running an illegal lottery as you would be liable to a fine of up to £5,000 and/or imprisonment for up to 51 weeks.

You can charge for entry into a competition as long as you think that the skill requirement will either deter a significant proportion of potential participants from entering or prevent a significant proportion of entrants from receiving a prize (such as crossword puzzles).

If questions are too easy (like the ones you hear on the competitions at the end of Jeremy Kyle, not that I watch it…) and the main route of entry is a premium rate telephone number or some other paid for route of entry, you must provide a free route of entry (which could include using a first or second class stamp or making a non-premium rate telephone call or text). Interestingly however, web entry may not satisfy the free entry route requirement. You must make this free route of entry clear and not discriminate between any methods of entry.

As well as the Gambling Act applying to competitions and prize draws, the CAP Code also applies.  The CAP Code applies to pretty much all non-broadcast promotions (ie anything not on TV or radio) and has recently been extended to cover paid for and non-paid for space under your control eg your social media sites.

Under the CAP Code, the promoter must ensure that the terms of the promotion are clear and well publicised – you can read the rules here but examples of what should be included are:

  • the full name and address of the promoter;
  • any restrictions on, or conditions of, taking part (for example, age, number of entries and geographical restrictions);
  • any requirement for a proof of purchase;
  • the closing date;
  • judging criteria;
  • the number and nature of prizes including those that are available to win and those that are guaranteed to be won;
  • how winners and results will be announced and if the promoter intends to feature the winners in post-event publicity;
  • who will own copyright in entries;
  • whether the promoter reserves the right to amend the rules; and
  • whether the promoter is allowed to provide a cash alternative for any prize.

So, if you are going to be running prize draws or competitions on Facebook or anywhere else, here’s what you must do:

  1. have clear terms of promotion well publicised; and
  2. if the competition does not require sufficient skill or knowledge to discourage a significant proportion of the population from entering OR it is a prize draw, then you must provide a free route of entry – web entry may not be sufficient, so in your terms you must say that people can enter by sending a letter to you at X address or by texting (at the cost of a standard rate text) to x number.

If you don’t have terms for competitions or prize draws in place and you would like to be sure that you are doing things properly, get in touch and we will help you with our very affordable options to protect your small business.

© 2013 Suzanne Dibble, business law expert

 

 

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Beware the image copyright web crawlers…

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What every copyright owner should know about Pinterest

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A relative new kid on the social media block, Pinterest is growing quickly, with rating figures suggesting that UK traffic increased almost 50% between December and January alone. Perceived as being particularly attractive to women, the attraction of the site is obvious: users can create virtual “pinboards”, grouping together images and other content under their […]

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Top 10 legal issues to consider when using Twitter

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Twitter can be a fantastic marketing tool, but you need to be aware of the legal implications. 1. Make sure you comply with advertising regulation The CAP Code now applies to websites, Facebook and Twitter (and any other non-paid-for online space under your control such as other social networking sites). The CAP Code says, amongst […]

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