Buckworth Solicitors - Introduction to start up law

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This is an introduction to start up law for entrepreneurs operating in the UK.

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<ul><li> 1. Introductionto Startup Law</li></ul><p> 2. b www.buckworthsolicitors.co.ukThe way to get started is to quittalking and begin doing Walt Disney 3. Introduction to Startup Law1question@buckworthsolicitors.co.ukCONTACTST. 020 8834 1616T. 020 7969 1867E. question@buckworthsolicitors.co.ukW. www.buckworthsolicitors.co.ukAn Introduction to Start-up Law ispublished by Buckworth Legal ServicesLimited trading as Buckworth Solicitors,Berkeley Square House, Berkeley Square,Mayfair, London W1J 6BD.Buckworth Solicitors is a bodyrecognised and regulated by theSolicitors Regulation Authority in theUK with registered number 559537including for any incidental servicesrelating to investments, insurance andmortgages.The content of this booklet is a generalsummary of a number of areas of law.It is not intended to be, and shall notconstitute, legal advice. You are stronglyin relation to your business and arenot permitted to rely on any statementcontained herein.Any recommendation of a third partysupplier made by us herein or otherwiseis made by us in good faith but does notconstitute a representation that suchsupplier is suitable for your business.Accordingly Buckworth Solicitorswill not be responsible for any lossessuffered by you arising from your use ofany such supplier.disclaims any liability for losses,damages or other expenses incurred byany person as a result of reliance on anystatement in this booklet.Copyright 2012. All rights reserved.No part of this booklet may bereproduced, stored in a retrieval systemor transmitted in any form or by anymeans, without the prior written consentof Buckworth Solicitors.I am Michael Buckworth, the Founder and Managing Partner ofBuckworth Solicitors.of serving the booming UK start-up market.advice and documentation. Hourly rates tend not to represent a gooddeal for clients. Furthermore they discourage clients from speaking tolawyers and building a close working relationship with them.We base our charges around the provision of documentation and aregenerally happy to give advice for free.The purpose of this Introduction to Start-up Law is to provide start-upswith a helpful, easy-to-understand resource to which they can refer asthey begin or continue their entrepreneurial journey.I hope that this resource is useful and informative. To the extent that youhave any questions or advice on any aspect of start-up law, please sendus an email or give us a call.Good luck with your business!We charge solely on the basis of 4. 2 www.buckworthsolicitors.co.uk1 Letter from MichaelBuckworth3 Commonly Used PhrasesA translation of commonly usedstartup jargon4Legal StructuresA summary of the legal structuresthrough which businesses can beoperated6 An Introduction to SocialEnterprise StructuresThe special entities created forsocial enterprises8 Customer AgreementsThe key terms to include inagreements with customers9 Privacy PoliciesWhat they do and why all onlinebusinesses have them10 Employment ContractsThe must have informationfor startups looking to take onemployees12 Intellectual PropertyRightsGetting it right from the startis easy. Getting it wrong is anightmare14 Shareholders AgreementsA corporate pre-nup. Not soromantic but much more sensiblein the long run16 Seed EnterpriseInvestment SchemeThe best thing to happen tostartups in a decade. Why youjust cant ignore SEIS18 Enterprise InvestmentSchemeThe big brother of SEIS andalmost as punchy. The way toattract investors using HMRCsmoney19 Business PlansHow to write the perfect businessplan20 About BuckworthSolicitorscan help entrepreneursContents 5. Introduction to Startup Law3question@buckworthsolicitors.co.ukCommonly Used PhrasesEntrepreneurs and lawyers use start up jargon. This is adictionary for the uninitiated.Articles of association: theconstitutional documents of acompany which are created onincorporation. If you set up acompany yourself, tick the boxto use the standard CompaniesAct articles. These are perfect forstart-ups and will probably onlyneed to be changed in the contextof an investment round.Drag along: this is a termfor a provision often found inshareholdersagreements.Itrefersto the situation where a buyer whohas acquired a certain percentageof the share capital of the company(often 90%) is able to force theremaining 10% shareholder(s)to sell their shares to him at thehighest price at which he acquiredany other shares. The rationale forthis provision is that a buyer whobuys 90% of a company probablywants 100%.Convertible debt: this describesa loan structure that can orwill convert into equity (seeexplanation of equity below)in certain circumstances. Thesetend to be the occurrence of aninvestment round, a sale or listingof the Company or the insolvencyof the company, in each case priorto the loan being fully repaid.Debt: a short hand for loans andraise money by way of debt orequity (see explanation of equitybelow). Debt simply refers tothe fact that the company hasborrowed funds from a third party.Equity: a short hand for shares.An equity investment is asubscription for shares. Holding10% of the equity means holding10% of the issued shares of acompany.Intellectual property rights:this covers patents, copyright andrelated rights, trade marks andservice marks, business namesand domain names, rights in get-up, goodwill and the right to suefor third parties passing off theirbusiness as yours and rights indesigns, database rights, rights toShareholders: these are holdersof shares in a company limited byshares and who together own thecompany in proportion to theirshareholdings.Pre-emption: this is used to referto two separate concepts thatshould not be confused. The mostcommon usage is in the contextof share transfers. Here, a pre-emption provision requires aselling shareholder who has anoffer to purchase his shares fromto sell his shares to the othershareholders on the same termsand at the same price as offeredby the third party buyer. This givesthe remaining shareholders theability to retain ownership of thecompany and, for example, to stopa competitor purchasing a stake.Occasionally, people will referto pre-emption rights. In thiscontext they probably mean rightscontained in statute and in thearticles of association stating thatany new shares to be issued bythe company to third parties mustto its existing shareholders.The procedure for doing this isrelatively involved and so oftenthese pre-emption rights arewaived by the shareholders.Tag along: this term refers to aprovision found in shareholdersagreements that requires a buyerof a stated percentage of theshares of a company (often 75%)to offer to buy the remainingshares at the highest price and onthe same terms as he purchasedthe 75% shares. This grants theoption (but not the obligation) tothe remaining shareholders to exitwith the majority. 6. 4 www.buckworthsolicitors.co.ukFor Profit Businesses:Legal Structuresto use. Fortunately, in the UK a limited company is cheap andIntroductionThere are a variety of legalstructures through which abusiness can be operated. We lookhere at incorporated structuresbusinesses.There are two main reasons foroperating a business through anincorporated entity (as opposedto operating a business as aadvantage of the limited liabilitynature of some incorporatedentitieswiththeresultthat(absentthe directors committing criminaloffences or the shareholdersgiving personal guarantees of thebusinesss liabilities) the founderswill not be personally liable onan insolvency of the business.The second (which is applicableto companies but not to limitedliability partnerships) is to havethe business taxed separately toits owners.Most common types of entitiesPrivate company limited byshares: this is a company witha share capital. Shares in thecompany construe an ownershipstake and are purchased eitherat their nominal value or at apremium (i.e.atnominalvalueplusan additional amount). Ordinaryshares generally carry three rights:the right to a vote at a meetingof the shareholders, the right toreceive a dividend (a distributionin the capital of the company(which is generally relevant whenthe company is wound up or itsassets sold). Crucially the liabilityof shareholders is limited to theamount unpaid on their shares.Limited liability partnership(LLP) this is a special kind ofpartnership structure which isrecognised as a separate legalentity from its members for thepurposesofenteringintocontractsand carrying on its business andhas limited liability. Unlike alimited company, however, an LLPis not taxed as a separate entitybut each limited partner is taxedaccordance with his proportionalLLP must be set up by two or morepeople with a view to carrying on 7. 5Introduction to Startup Lawquestion@buckworthsolicitors.co.ukTaxation of companies and thereliefs availableCompanies have to paycorporation tax each year. In thetax year 2012/13, this is chargedallowable expenses) at 20% up300,000. Thereafter corporationtax is charged at 24%. Oncecorporation tax has been paidon any income, that income canremain in the company and (undercurrent tax law) will not be taxedagain unless and until it is paidout.Companies with a turnover inexcess of 77,000 in tax year2012/13 are required to registerfor VAT. Companies with aturnover below that threshold arenot required to register, but mayif they wish. VAT is chargeableat 20% on provision of VATablegoods and services and is payableto HMRC in arrears. Companiesregistered for VAT are permittedto offset VAT they have paid (inputtax) from VAT they have charged(output tax).Subject to meeting certainentrepreneurs relief is available tofounders of a company when theysell their shares. Entrepreneursrelief reduces the capital gains taxpayable on any gain arising on asale of shares to 10%.As discussed later in this booklet,SEIS and EIS reliefs may beavailable to investors investing incompanies. These reliefs includeincome tax relief up to a maximumof 50%, capital gains tax relief upto a maximum of 100% and lossrelief.Ongoing costsLimited companies are requiredon an annual basis: a returnto Companies House, annualaccounts (or, if the Company isdormant, a dormant return) and acorporation tax return.If the company has employees, itmust deduct PAYE and accountto HMRC monthly for suchdeductions and its own employersNIC liabilities.When new shares are issued and/or directors are appointed orCompanies House.The cost of this compliance isare made on time, the fees payableto Companies House should notexceed 50 per year. Accountancyfees will vary depending on thecomplexity of the companysbusiness but in general should bein the region of 1,000 to 2,000.Where the company is dormant,accountancy fees should benominal.annual returns but they are notlimited partner will be requiredinto account his proportion ofthe earnings of the LLP. The feespayable to Companies Houseshould be similar to those of acompany.Choosing a legal entityBefore choosing a legal entity,you should consider the followingquestions:(i) Is my business sellinga packageable product,software or service or isit a means for me (and myfellow founders) to sellour time, experience andknowledge?(ii) Will the business needinvestment in the future?(iii) What is my exit strategy?(iv) Is there any reason whyI would want to be taxedof the business?As a general rule, limitedcompanies are ideal structuresfor businesses that want tobring on board investment, orcommercialise a mass marketproduct or service. Bringing ininvestment is effected (relatively)simply by issuing shares; selling astake in the business (or the entirecompany) is achieved by a saleof shares. In addition there are aavailable on the issue and sale ofshares.Investing into an LLP is morecomplex whilst selling thebusiness of an LLP is generallymore challenging and often lessGetting the structure right up frontis important as changing it latercan be complicated.Limited companies are idealstructures for businesses that want toseek investmentCompanies must pay corporation tax 8. 6 www.buckworthsolicitors.co.ukAn Introduction to SocialEnterprise Structuresand cons of each approach.IntroductionA social enterprise is a businesscarried on for a social purpose.Social enterprises can be operatedvia a number of structures.The desire to pursue a socialpurpose impacts on the structure,the main, social enterprises aimwhich they were set up, rathershareholders.One of the most important thingsto consider when setting up asocial enterprise is what legalstructure to choose. It is vital toconsider which structure will offerthe best protections for the socialpurpose, how the structure willimpact on the businesss ability towhat tax breaks will be available(if any) and how stakeholders canbe incentivised.A social enterprise can operate viaone of a number of legal structures.These include an unincorporatedassociation, a company limitedby shares or by guarantee, acommunity interest company, anindustrial provident society ora limited liability partnership.Further, a charity can be operatedthrough a number of structures.Sole traders, partnerships andunincorporated associationsHowever, those responsible forrunning the business will bepersonally liable and exposed tothe full risks and liabilities of thebusiness. For this reason, they tendnot to be practical structures forbusinesses operating in the publicliabilities.Common legal structuresCommunity interest company(CIC): CICs were originallyestablished as a social enterprisestructure for businesses witha social purpose which did notwish to become a charity. The CICstructure requires the businessto offer safeguards to protect itscommunity purpose. This is donevia the imposition of an assetlock. The asset lock is containedin the articles of association ofthe CIC and operates to protectthe community purpose. Assetscannot be distributed to theCICs shareholders (except inlimited circumstances whichinclude offering limited returnson investment and reasonableremuneration to directors andemployees). Upon a winding up ofthe CIC, the assets must be appliedand not to repay creditors. TheCIC cannot transfer any assets forless than market value apart fromto another CIC, other asset lockedcompany or charity.structure which protects thecontinuation of the social purpose 9. 7Introduction to Startup Lawquestion@buckworthsolicitors.co.ukcharity structures and can offerlimited returns on investmentto investors and reasonableremuneration for directors.They are regulated by the CICRegulator which offers a lightertouch approach to regulation thanthe Charity Commission. The CICmust satisfy a community interesttest both upon incorporation andthroughout the CICs lifespan.Further the CIC must providea community interest reporteach year setting out how thecommunity interest has beenpursued.Limited company: businessesan asset lock without restrictingthe possibility of operating thecan use a standard limitedcompany structure and replicatethe asset lock provision in thearticles of association. However,unlike CICs, the shareholders ofsuch companies can amend thearticles...</p>