FAQs

We have the answers to your legal questions

Why use a company instead of operating as a sole trader?

As a sole trader, your business is just you, even if you trade under a business name that gives the impression of a larger concern. If you are a sole trader, when things go wrong, or you need to borrow money, or your business is sued, you are potentially on the hook for the whole of your personal assets.

When you set up a company, you create another legal entity (like another legal “person”) that can enter into contracts, borrow money and be sued, all in the company name. Setting up a company gives you limited liability, and can offer you a degree of protection for your personal assets. A corporate structure can also be beneficial for tax planning purposes.

What is a shareholder agreement and why might I need one?

It is a binding document designed to regulate the relationship between the shareholders of a company. If you are a shareholder in a company and you either already have other shareholders or you want to bring some on, potentially as directors as well, then a shareholder agreement can be very useful.

It sets out the rights and obligations of each shareholder to the other(s), can define roles and responsibilities and can set out a framework for what should happen if things go wrong, or someone wants to sell their shares or even the whole company. Yes, the articles of association may regulate some of that relationship, as may the Companies Act 2006, but you might want to make things more detailed and also you might want to keep some things off a public register (unlike articles, which are a publicly-viewable document).

How important are terms and conditions for my business?

The short answer: very. These are contractual provisions that you want to govern the relationship between your company and its customers. Often, different provisions will apply to individual customers (business to consumer or “B2C”) as opposed to business customers (business to business or “B2B”). Most businesses nowadays have terms of use for their websites, and on those sites there may also be a link to the terms and conditions which will apply when a customer, individual or business, buys products and services from your business.

Terms and conditions are therefore very important: you will want to use them to protect your business as much as possible, whilst being open and clear with your customers as to what their rights are. Laws like the Consumer Rights Act 2015 will regulate what you can and can’t say to consumers, and what promises as to quality, refunds and so on you need to give them. You can impose stricter terms and conditions on businesses you sell to because businesses are expected to be able to protect themselves to a greater degree than ordinary consumers.

Why should my company consider investing in or buying another company?

If you want to diversify, or to grow faster than organically, or to take out a competitor, then taking a stake in a suitable target company, or buying it outright, is one way to do it.

We have had farmer clients diversify more than Jeremy Clarkson and we have had IT entrepreneurs investing in a hospitality business. A travel company in Dorset decided to purchase its (local) competitor to accelerate growth, or a US multinational tech behemoth snapped up a clever piece of tech, together with the whole company.

What are Directors' duties and why are they important?

Companies have shareholders – the owners – and they also have directors: not necessarily the same people, even though often, especially in a smaller company, they are. The directors of a company are responsible for its day to day operation, for its cashflow and accounting (they sign off the accounts even if audited). They may be paid under a service contract with the company, or unpaid.

If you are a company director, you generally owe a duty to act in the best interests of the company as a whole, and not to do anything that might conflict with that, including, for example, entering into contracts with the company simply to benefit yourself. In the latter example, you would need to disclose any conflict of interest to your fellow directors and they would be entitled to vote on whether or not to authorise that conflict of interest.

You must exercise reasonable care and skill in your role. You also have an obligation not to continue to trade if you believe the company to be insolvent – which means unable to pay its debts as they fall due, and this can, in certain circumstances, trigger personal liability for a director.

The obligations of a director can be onerous, but you can check the Government website for free guidance, as well as the Companies Act 2006 and your company’s articles of association. There may also be obligations for shareholder/directors set out in any shareholder agreement that your company has.

We advise directors in a number of areas, as often it can be unclear as to where limited liability stops and personal liability starts.