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Making sense of Business Law

From hairdressers to handymen, from CEOs running networks across the globe to the local deli around the corner, Business Law is fundamental to any business or company, irrespective of size or sector.

What is Business Law?

Business Law is the study and principles of companies and organisations. It embraces the formation, including the setting up (incorporation, structure and governance) of businesses, and how they run and transact.

Although this area of law is very wide-ranging, it deals primarily with defining the rights and responsibilities of businesses, rather than enforcing these laws.

In essence, Business Law is a broad concept that describes stuff that governs transactions between business entities, apart from maritime transportation of goods, which is regulated by Admiralty and Maritime Law. Businesses interact and make transactions in lots of ways; leasing, contracts, mergers and acquisitions, to name just a few.

How these transactions are carried out is overseen by Business Law - other areas of law govern different types of transactional business; like commercial law and contract law.

Because of its extensive scope, Business Law has spawned a large number of legal practice area subcategories. There’s Business Law, Corporate Law, Company Law and Commercial Law. All very closely related; so much so that the terms are often used interchangeably, and the legal issues they address frequently overlap.

How do I form a company?

Before you form or ‘incorporate’ a company (this means forming an entity recognised by law), first consider what type of business would suit your particular situation and aspirations. Business Law covers all different kinds of business such as sole-trader, partnership, limited liability partnerships (LLP), private limited companies (LTD) and so on.

You may wish to consult a corporate law solicitor or lawyer who can help identify exactly what you (and what you have planned for your business) may require, and advise on the most suitable structure and type of ‘business’ entity for your company.

In England and Wales The Companies Act 2006 has made it easier for ‘one man bands’ (for example, a sole trader) to become a private limited company and enjoy all the ‘limited company’ benefits that come along with it.

For example, nowadays a private limited company only requires one director who can act as company director AND company secretary. It’s then easier to carry out all the stuff required by law without involving more people than is necessary (or wanted).

Company Formation Process

If you decide to go along the private limited company route then you will need to do the following:

  • Decide on your company name and address – check the company name is available at Companies House (if another company already has the exact name, you’ll then need to choose another one). There are certain rules about company names which you will need to understand and adhere to. Start by checking here.
  • Decide who is to be a director – you must have at least one person (who is 18 or over) who will act as company director and secretary, and provide the relevant details required, such as full name, address and date of birth.

A recent Panorama investigation has found that some companies appoint nominee directors as a means of evading tax or committing other financial crimes. Don’t do it. It’s fraudulent and a criminal offence.

  • Decide on the share capital of the company and who will be the shareholder(s). You must have at least one shareholder and allot one share to that original shareholder on day one – and then supply the required shareholder details.
  • Carry out the registration by submitting the required company formation form to Companies House – including the company name, company director, share capital and shareholder(s) details.
  • Pay the formation fee.

How much does it cost?

You can register ("incorporate") a private limited company online for a £12.00 fee on the Companies House website which will also provide you with incorporation and names guidance. You’ll find more useful information about company names and Trade Marks in our trademarks section.

It is a legal requirement to register your limited company at Companies House.

As part of the company formation process, you must also have a Memorandum and Articles of Association, which you’ll need to register at Companies House. This governs the relationship between the company and the outside, and contains important rules about the company; for example, directors voting powers, how to buy and sell shares etc. and again, is a legal requirement.

Do I need to be VAT registered?

Before you form a company, you should also consider applying for a VAT number, particularly if you think you’ll incur a lot of expenses where you’re purchasing vatable items; e.g. laptops, computers, furniture, company car etc. It’s also a legal requirement for any business earning more than £83,000 per annum to be registered for VAT. Failure to do so is tax evasion and may be a criminal offence.

Because the constitution of your company may be complex and possibly require other agreements (such as a Directors Service Agreement; a Shareholder Agreement; a Cross-Option Agreement) to be put in place in relation to governance, power, voting etc, you may wish to enlist the services of a qualified corporate lawyer or company law lawyer. This will inevitably have a financial impact, and so needs to be factored into your budget.

It’s a bit like planning the Divorce, while you’re planning the Wedding. But putting these things in place at the formation stage of your company and start-up phase can actually save a lot of money, particularly if or when your directors and shareholders disagree with the running and direction of the company in future months and years. 

What is a Directors' Service Agreement?

A Directors' Service Agreement is a contract of employment between you (the director) and your private limited company. It will include the usual employment terms (such as salary, bonuses and holidays) as well as more complex terms such as the requirements of the company board and fiduciary duties (that means taking responsibility and care for the companies assets). In essence it is a high level (executive) employment agreement which regulates the employment relationship between you (as an executive director) and your company.

What is a Shareholder Agreement?

In general, the relationship between the shareholders and the company and the relationships amongst all of the shareholders are regulated by the Articles of Association of your company. That’s a key reason for having Articles of Association and why they are legally necessary and legally binding. So it’s not actually a legal requirement for your company to have a Shareholder Agreement.

But, in very simple terms, a Shareholder Agreement is a private contract (an agreement) amongst the shareholders of your company. It is a very useful agreement to put in place particularly where there are a relatively small number of shareholders (and where some have a minority stake-holding). It is quite common in practice for the shareholders to wish to supersede (and supplement) the Articles of Association for the following reasons:

  • To make some rules and regulations in relation to the day-to-day internal management of your company.
  • Flexibility; your shareholders may think that the company's day-to-day business requires regular changes to its arrangements, and it may be a real pain to have to revise the Articles of Association.
  • Your shareholders might wish for disputes to be resolved by arbitration or in the courts of a foreign country (for example, a country other than England or Wales – where you incorporated your company via Companies House).
  • Your company's Memorandum and Articles of Association documents are available to the public to view; anyone can search the register at Companies House and (for a small fee) can find out the constitutional details about your company. However, the terms of a shareholder agreement are confidential between your shareholders and as such, are hidden from prying eyes. You do not have to register your shareholders agreement at Companies House.
  • The Articles of Association may not provide enough protection for minority shareholders who may want to better protect themselves by putting a shareholder agreement in place.
  • Conversely, your shareholders agreement can provide mechanisms for removing minority shareholders, placing restrictive covenants (clauses) on those shareholders who leave the company and restrict to whom a shareholder can transfer his or her shares.
  • This contractual arrangement (which is what your shareholders agreement is) is generally cheaper and less formal to create, administer, amend or end.

What is a Cross-Option Agreement?

In very simple terms, a Cross-Option Agreement will give a surviving shareholder the right to require the deceased shareholder’s personal representatives to sell the shares to them; this is sometimes also called a ‘Call Option’. It does not create a legally binding obligation on either party to buy or sell the shares but it does give both parties an option to buy or sell the shares at some time in the future. Only when the option is exercised will a binding contract be created.

A Cross-Option Agreement is particularly useful if, for example, your private limited company is owned by the two founders of the business (who are both directors and shareholders in the company) and one of the founders dies. If there is no Cross-Option Agreement in place and this happens, then some unwanted outcomes may occur:

  • The surviving founder might want to buy the shares from the deceased but the executors of the deceased founder may not wish to sell them.
  • The widow(er) of the deceased might want to get involved in running the business which the surviving founder may not want.
  • The executors of the deceased founder may wish to sell the shares but the surviving founder may be in a position where he or she does not wish to buy them or may not have enough money to buy them. If the surviving founder does not have sufficient funds then the shares may be sold elsewhere meaning the surviving founder is highly unlikely to be satisfied with this outcome i.e. potentially having a complete stranger come into the business.

What next?

Visit Companies House website for further information and guidance.

If you're thinking: “I don’t want a lawyer to tell me what I cannot do. I want a lawyer to tell me how to do what I want to do.” It would be prudent to get some good face-to-face advice from a commercially savvy lawyer. Try and get a personal recommendation of a corporate lawyer, business lawyer or company law solicitor from a friend, colleague or family member.

In these challenging economic times it would be well worth popping in to see somebody who is legally qualified, at least for an initial chat.

Published on 24th January 2013
(Last updated 19th August 2016)

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