Commercial Law: Frequently Asked Questions

Should I incorporate my business?

When your business reaches a certain level, you may start considering whether it is worthwhile incorporating your business into a company.

From a legal perspective, incorporating your business carries with it the protection that comes with “limited liability” (hence the name “Limited” or “Ltd” after company names). To explain by way of example, if your business was to suffer from an unexpected liability as a result of which you were unable to meet your debts, then your personal assets (such as your house) may be at risk if you cannot meet your liability through normal means. If, however, your business was incorporated into a company, then the liability is limited to the assets held by that company and your personal assets would remain unaffected.

Furthermore, business incorporation can sometimes be a useful tool in succession planning. If you need to pass your business on to another generation or sell your business, all you would technically need to do is transfer the shares in the company, rather than deal with the transfer of each and every asset held in the business.

However, the advantage of limited liability can be diminished if you rely on borrowing to fund your business, as banks and other financial institutions will usually require you to personally guarantee your company’s debts, meaning that you will still be personally liable in the event that your company enters financial difficulty.

Another disadvantage of incorporation are the administrative requirements that have to be complied with, which will necessarily come at a cost. For example, companies are required to file annual accounts and annual returns at Companies House, which will be available for inspection by the public. This is not the case with personal businesses.

Ultimately, the decision as to whether to incorporate your business will depend on a combination of the factors above and, most importantly for some, on your tax position. It is therefore important that you take advice on your tax and legal position from an accountant and from a lawyer before deciding whether you should incorporate your business.

I’m thinking of selling my business. What should I do? How do I sell my business?

Before thinking of selling your business, you need to consider your business and personal circumstances, the circumstances of your buyer (if you have one) and the nature of your business.

This is because these factors will impact how best to structure the sale of your business, both from a risk and liability perspective but also from a tax perspective. In some circumstances, it may be more beneficial for you to sell the shares in your business (if your business is incorporated), whereas in others it may be more appropriate for your company to sell the business assets that it owns. It is therefore important that you take advice from a solicitor and from an accountant at an early stage.

If you have found a buyer, it is important that you do not disclose any sensitive business information to them until they have entered into a confidentiality agreement with you – this is especially important if the proposed buyer is a competitor of yours. We can assist you with such a document.

If you are at a slightly earlier stage and have not yet found a buyer, it may be worthwhile to “groom” your business prior to a sale in order to make it as attractive to potential purchasers as possible and to maximise the potential sale value. Ways you can do this include formalising/re-negotiating key contracts with customers or suppliers, drafting and concluding standard terms and conditions of sale, incorporating your business, re-negotiating or renewing the terms of any leased premises, and ensuring that you have up-to-date authorisation and consent documents and permits from the relevant authorities, to name but a few. What will be important to focus on will depend on the nature and size of the business and it is key to establish at an early stage where the real value in your business lies.

It is therefore important that you take professional advice at a very early stage to ensure you are as well-prepared as possible when it comes to selling your business.

What do I need to consider when buying a business?

When buying a business, you will need to consider many of the issues that have already been mentioned above. Most importantly, it is key that you engage a set of professionals to conduct due diligence into the assets and liabilities of the target business, including from a legal perspective and from a tax/accounting perspective.

Once you and your advisers have considered the business in detail and you are happy to proceed, your legal adviser will then prepare a sale and purchase agreement which will set out the terms upon which you are willing to purchase the business, along with any pre-conditions. Your advisers should also negotiate a set of “warranties” relating to the business upon which you ought to be able to rely and which will give you the opportunity to recover some of the purchase price should there be issues with the business that are only identified post-purchase.

If you want any further information regarding any of the above, call us on 01502 532300. Our solicitors have extensive experience in dealing with corporate and commercial matters.