Our specialist Corporate Commercial Solicitors have many years’ experience advising entrepreneurs and people with new ideas on how best to prepare and protect their new business for the future as it grows and develops.
We also have experience of working with spin-out companies which are typically seen where university research is commercialised.
Usually a new company is formed with the university and the individuals responsible for generating the intellectual property rights (typically employees of the university) as the shareholders. The new company will be licensed access to (if not assigned to the new company) the intellectual property rights of the university (and sometimes the facilities and services of the university). The university and the founders may also seek to partner with external investors in order to raise capital to initially fund the new company’s work.
The legal documents associated with the spin-out process are:
- Subscription and shareholders’ agreement, together with a new articles of association for the new company;
- Intellectual property licence and/or assignment of intellectual property to the new company;
- Ancillary agreements such as consultancy or secondment agreements, research agreements and facilities or access agreements.
It is often perceived that the decision to start a business is largely a commercial one. Although it is true that commercial factors play a large part in the process, it is important to realise that personal factors are equally significant.
Important initial considerations include choosing the right product or services, obtaining the right financial backing, having the right support (particularly from family and friends) and getting the best advice.
When starting a new business, it is important to consider how you are going to fund your business and what short and long term options are available to you.
Short term funding – there is usually a period of time when your outgoings and costs vastly exceed your income as you develop your products and build you brand, image and market share. Short term funding provides the relief that you need in order to pay your employees, purchase initial materials and products as well as begin advertising and promotion.
Long term funding – in many cases, long term funding is vital to the future growth of businesses, providing an injection of cash to allow businesses to complete new projects, purchase new premises or even to purchase other companies.
There are a number of different types of funding available to start-up businesses and each should be considered carefully to obtain the right funding mix for you and your company.
The bank will require a business case, realistic cash flow forecasts and for you to prove that you’ll be able to pay back the loan with interest. The bank will also generally ask for security - this could be in the form of a personal guarantee by the shareholders / directors, a charge (usually in the form of a debenture or mortgage charge) over all the assets of the company and also specifically over any property.
There are a number of government schemes or grants available to start-up businesses. Some schemes have specific criteria which you must meet, such as location, products and employment of staff to name a few. Each should be explored carefully to best maximise your funding options.
Issuing new Shares
Issuing new shares in your business is another way to raise funding and investment. Whilst you may wish to offer shares to friends and family, you should consider the consequences if you have a disagreement and if they can provide the level of capital you are looking to secure. External funders, on the other hand, may be able to provide you with more than just funding, such as expertise, support and other contacts.
Examples of equity funding include:
- Business Angels – wealthy individuals and entrepreneurs who invest in small and start-up businesses;
- Venture Capitalists – organisations who invest money in businesses that they think will grow quickly with a view to making a profit on the sale of their shares;
- Crowdfunding – a new approach to funding due to the growth of the internet. A large number of people will invest smaller amounts and spread their investment.
Choice of Trading Entity
The structure of your business is vital to its success. You will need to balance a range of factors including tax, the level of personal liability you are willing to take for the debts and liabilities of the business and the ownership and growth of the business.
The 4 most common structures to choose from are:
- Sole Trader
- Limited Liability Partnership
- Limited Company
Key factors to consider include:
It is important to consider your tax position when setting up your business and it is important to seek advice from a specialist tax advisor who will be able to provide you with a number of options.
Personal Liability for Debts
If you operate as a sole trader or as a partnership you will have unlimited liability for the debts of the business. This means that a creditor could recover any sums due to them from you personally without limit, potentially including taking your house and belongings. In contrast to this, a limited company and a limited liability partnership (LLP) offer a higher level of protection, only allowing creditors to pursue the limited company or LLP for the assets that it holds.
It is important to note that some creditors (mainly banks) will ask for personal guarantees to provide them with a further level of security.
Ownership and Future Growth
If you are looking for investors or you intend on going into business with others, you may find that a limited company structure provides far more benefits for you than the other structures.