September 2015 - The five most important things for directors of new companies


Business Law Update
September 2015

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Starting a new business is a very busy time and you are probably receiving advice from everyone as to what need to be done. Legal matters to attend to are perhaps the trickiest of all: it is easy to find advice on what you should be doing but what are the most important things to attend to?

From our experience, there are 5 things that directors of a new company should consider from the outset to avoid significant problems down the line.

1 - Structure

You need to consider who the directors and shareholders will be and what they will be doing.

In many cases, it will be straightforward to know who they will be: the people who are putting in the money and effort to get the business off the ground. However, some thought should be put into how you want the business structured at the board and shareholder levels not just now but in years to come. It’s much harder to change the structure later.

If you have many people putting money into the business for example, do they really need to be directors as well as shareholders and what powers should they have? The directors are the people who actually run the company whereas the shareholders are those who finance it by putting in capital. The shareholders are the owners of the company and they may want a say on important decisions. They also get a share of the profits through dividend payments and a share of the sale price if the company is sold.

You should also consider what happens if a shareholder leaves. Do you want a say in whether they can transfer their shares and to whom? How are they going to be repaid for their shareholding?

All these things can be put into a Shareholders’ Agreement. Your solicitor will advise you on what sort of things you should consider as part of the process of drafting a Shareholders’ Agreement.

It is also useful to set out what each director is expected to do. This can avoid a lot of misunderstanding in the future. It is quite common for example for one director to be dealing with sales and marketing, another with finance, and another with operations and managing the company. It is therefore useful to set out exactly what everyone is expected to do and what decisions need to be made jointly between the directors.

2 - Funding

All new companies require funding, of both start-up costs and working capital. You should put some considerable thought into how the company is going to finance itself during the initial start-up period and then on an ongoing basis.

You should consider whether the initial injection of funds into the company by its founders should be by way of capital or loans. You should also consider how initial funds are going to be repaid (if at all). If for example the money was introduced as loans, can it be repaid on demand, or only if the company can afford it (in which case what exactly do you mean by this?) and whether interest should be paid on the money lent. If you have an accountant, it is worth talking to him or her about how to structure this.

As a limited company, it is likely that your bank will require the directors to give personal guarantees. If you are going to use factoring or invoice finance as a way to assist your cash flow position, then you are going to have to give personal guarantees here as well and similarly if you will be hiring plant and equipment.

You should consider what would happen if a director who had given a personal guarantee were to leave. The bank, financial institution or hire company may not wish to release you from your guarantees. Discuss this possibility with them before you sign the guarantees and also consider obtaining an indemnity from the other directors so that, if you do leave and cannot be released from your guarantees, you can reclaim anything you have to pay from the other directors.

3 - The impact of large projects/contracts

Before taking on a large project, you should always consider what would happen if it went wrong. It is common for this to be the cause of failure for many new companies: a dispute arises, your customer stops paying you and this causes insurmountable cash flow problems. Many such issues can be avoided by getting the contract right in the first place. Whilst you may not wish to spend the money on legal fees to negotiate many of your contracts initially, doing so particularly with large projects that could cause severe damage to your company if they went wrong, is well worth doing.

4 - Legal action

Disputes are a fact of business and many disputes can be avoided if they are dealt with at the outset. It is all too easy to try to ignore them and hope they will go away. Many will but there are some things which demands urgent attention.

The most serious is a winding up petition. If one is issued against your company or a threat is made to issue a petition, this needs to be taken very seriously as, if you don’t take immediate action, it will lead to your bank account being frozen even before the matter has come to court.

There really is little alternative here to either paying up the money demanded or taking urgent legal advice. In many cases, this can lead to the matter being settled or to the winding up petition being withdrawn.

You should also take action if you are threatened with being sued for large amounts. Whilst this is not quite so urgent as dealing with winding up petitions, litigation can be very expensive and, if it can be resolved before court action is taken, you will save yourself a lot of legal costs and, perhaps just as importantly, stress and demands on your time in dealing with the case effectively.

5 – Take advice promptly

It’s a good idea to get advice on the above as soon as possible. You may need an accountant to advise on the structure and finance requirements before you set up your company. A solicitor is best to put these into a Shareholders’ Agreement for you.

Before you sign large contracts, see what terms you can negotiate. When doing so, always think about what could go wrong and how best to avoid it. It is a good idea to have a solicitor look over the contract before you sign and, even better, for them to negotiate the contract on your behalf.

If you are threatened with winding-up proceedings or a court case for a large amount, take advice from a solicitor as soon as possible.

Gary Cousins
Business Solicitor

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Gary Cousins
Sue Mann
Nigel Musgrove
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