Starting a Business: The Legal and Tax Questions to Settle First

Most of what goes wrong in a young business was decided, or left undecided, in its first few weeks. This note sets out the questions worth settling before trading starts: what structure to use, what the founders should have in writing, which registrations arise, and what records to keep from the beginning.

Choosing the structure

The first decision is what the business is going to be: a proprietorship, a partnership firm, a limited liability partnership, or a company. They differ in how liability is borne, how they are taxed, what compliance they carry, how easily ownership can be transferred and how they are perceived by customers and lenders.

There is no structure that is right in general. A single person testing an idea and a venture with several founders and outside investment are answering different questions. What matters is that the choice is made deliberately, with the consequences understood, because changing structure later is possible but is more work than choosing well at the start.

How liability for the business's obligations is borne
How the business and its owners are taxed
What ongoing filings and compliance the structure carries
How ownership can be transferred, and whether outside investment is contemplated
How the structure is regarded by customers, suppliers and lenders

What the founders should have in writing

Where more than one person is involved, the arrangement between them should be recorded before the business begins, not after it succeeds or fails. Who contributes what, who does what, how profits are shared, who decides what, and what happens when somebody wants to leave are the questions that later become disputes.

The document depends on the structure — a partnership deed, an LLP agreement, or the constitutional documents and a shareholders' arrangement for a company — but the questions it has to answer are much the same. The most commonly omitted and most consequential of them is what happens on a founder's departure and how their stake is valued.

Registrations and approvals to consider

Which registrations a business requires depends on its structure, what it does, where it operates and its scale. Some follow from the structure itself. Some follow from the activity — a trade or establishment licence, a food, drug or pollution approval, or a licence particular to the sector. Some follow from turnover or from the nature of the supplies made.

Registration under the goods and services tax law arises in defined circumstances, and whether a particular business is required to register — or would benefit from registering voluntarily — should be established for that business rather than assumed. The same is true of registrations relating to employees, which arise once a business reaches the point at which the relevant law applies to it.

The documents the business will actually use

A business generates the same documents repeatedly: terms on which it supplies, terms on which it buys, engagement letters or employment documents for the people who work in it, and whatever the premises arrangement requires. Preparing these once, properly, at the start is far cheaper than dealing with the consequences of not having them.

The single most valuable clause in a young business's supply terms is the one dealing with payment: when it falls due, what happens if it does not arrive, and what the business may do about it. A great deal of recovery litigation exists because that clause was never written.

Records, from the first day

Books of account, invoices raised and received, bank records, and the correspondence in which arrangements were made are what every later question is answered from — a tax notice, a dispute with a customer, a claim by a departing founder, or a purchaser's due diligence.

Keeping business money separate from personal money from the first day is the discipline that makes all of this possible. Where the two are mixed, reconstructing the position afterwards is expensive and sometimes cannot be done convincingly at all.

Who does what

This is a firm of advocates. Advice on structure and its legal consequences, the drafting of founding documents and commercial contracts, and assistance with registration applications and with replies to authorities is our work.

Preparation of returns is carried out with, or coordinated with, a chartered accountant, and audit and any certificate that only a chartered accountant or company secretary may sign is their work. No professional designation is claimed for anyone at the firm beyond enrolment as an advocate.

Checklist

Practical Checklist

Decide the structure deliberatelyWeighing liability, taxation, compliance, transferability and how the business will be perceived.
Record the arrangement between the foundersContributions, roles, profit sharing, decision-making, and departure.
Settle how a founder's stake is valued on exitThe method and the valuer, stated expressly rather than left to be agreed.
Establish which registrations applyThose following from the structure, from the activity, and from scale.
Check the position on tax registrationsIncluding whether registration under the goods and services tax law is required or advisable.
Check what the premises requireThe lease or licence for the place of business, and any approval tied to it.
Prepare standard supply and purchase termsEspecially the payment clause and what follows on non-payment.
Prepare documents for the people you engageEmployment or engagement documents, with confidentiality and ownership of work dealt with.
Open a separate bank accountBusiness money kept apart from personal money from the first transaction.
Set up books and document retentionInvoices, bank records, contracts and correspondence, kept from the beginning.
Note the recurring filingsWhat has to be filed, and when, for the structure chosen.

Cautions

Common Mistakes

Starting to trade before deciding the structureUnwinding arrangements entered into by the wrong entity is avoidable work.