It may sound like a negative start to your business life, but planning for the worst – or at least understanding what can happen – is absolutely essential. It is imperative that you consider all aspects of potential liability so that some contingency plans can be put in place. You should seek specific advice from your accountant and your lawyer in this regard, but here are some things to consider:
1. Legal Liability due to your operating structure
See the following notes on structure for more detail, but remember that sole traders and partnerships carry with them the unenviable status of unlimited liability, whereas a limited liability company or trust may provide some protection under the corporate veil in the event of disaster.
2. Securing your personal assets
It is often a good idea to separate your personal and business assets where possible, so that if one area of your affairs fall in to financial difficulty, the other has some form of protection. Many people use trusts to hold personal assets when they go into business to protect those assets in the event of business failure. Again, it is crucial to seek good professional advice from a trust specialist, and to ensure that the ongoing compliance (such as financial accounts, minutes of meetings recording decisions etc) are kept up do date and your trust is not held to be a sham.
3. Directors Liability
Directors hold a higher standard of care under the Companies Act, and in certain circumstances can still be held liable for the debts of the company despite the protection of the limited liability. This may occur when the Companies Act has been breached in some way such as reckless trading, fraud or the most common problem, trading while insolvent.
4. Directors Guarantees
The golden rule is to never provide a directors guarantee, however this is easier said than done. For a new company starting out, the bank will definitely demand a guarantee to secure a loan or overdraft, the landlord will probably require a guarantee on the lease of the premises and some suppliers may require you to personally guarantee payment of the account in the event of the company defaulting. Try to give as few of these guarantees as possible, and ensure that all guarantees given are recorded on a special register and kept in a safe place. Revisit the register at least once every year and try to get guarantees removed once you have built up a solid trading history. It is not uncommon for retired directors and previous shareholders to have guarantees called up long after they have sold the company because they forgot that they were in place. Of course, never guarantee a debt on behalf of someone else, and always assess the risk before you commit to any guarantee. Once they are in place, they are very hard to get removed.
There are many types of insurance available. Remember to consider insuring your intellectual property as well as your physical assets. Sometimes insurances such as Key Man, Shareholders Protection, Disability or Trauma are overlooked but they can be the most important – particularly where the business relies on a few key people. Consult an insurance adviser with business experience before committing to your insurance portfolio. Always remember to insure for public liability or professional negligence. Again, you will probably never need it, but mistakes in this area can be extremely costly and can kill a business very quickly – even if you think you are not at fault. In fact, the legal fees for defending these actions have sent companies to liquidation alone!
6. Shareholders Agreements
If you are going in to business with anyone else – even if it is a close family member or your best friend (in fact especially if it is a close family member or your best friend) – a shareholders agreement is crucial. Your professional adviser can help you with an agreement, but essentially they are there to cover what is to happen in the event of something going wrong. Things to consider are:
A. Powers to make decisions
B. Job descriptions for shareholder / directors
C. Regularity of directors meetings
D. Dividend policies
E. Share valuation template
F. Process for settling disputes
G. Handling the death of a shareholder
The above points are a minimum, and in reality you can make your agreement as simple or as complex as you desire. Please ensure that you fully understand your agreement prior to signing it. We hear many stories of people who did not understand the consequences of their agreement until it was too late