Chapter 5

Structuring Your Business

In This Chapter

Finding the right business form

Exploring working on your own

Going into partnership with others

Starting a larger company

Looking at all kinds of legalities

When you start your business, you have to make a decision more or less from the outset on the legal structure you’re going to use to trade. Although that’s an important decision, luckily, it’s not an irrevocable one. You can change structures as your business grows – though not without some cost and paperwork.

The simplest structure is to make all the business decisions yourself and take all the risk personally. You don’t have to shoulder all the responsibilities when you start a business, though most people initially do so. It may be great doing everything your way, at last, after the frustrations of working for someone else. But it can be lonely or even scary with no one with whom you can talk over the day-to-day problems and share the responsibility of decision making.

If your business requires substantial investment, or involves other people who have a more or less equal hand in the venture alongside you, then your decision about the legal structure of the business is a little more complicated.

In this chapter, you can find all the important factors to consider when deciding on the legal structure for your business. And while on the subject of legalities, I look at other areas of interest, from intellectual property to dealing with unpaid invoices.

Choosing the Right Structure

Different legal frameworks exist for the ownership of a business and not all are equally appropriate for everyone.

Most small businesses in the UK start out as sole proprietorships; however, by the time they register for VAT (value added tax) – in other words, after they’re up and running – then owners tend to seek the shelter of limited liability (see Table 5-1.)

Table 5-1 Popular Business Structures (%)

One of the many factors you have to consider when deciding on the legal structure of your business is tax, including VAT and its implications, and I talk about how to manage your tax position in Chapter 14.

But even more compelling reasons than tax may exist to choose one structure over another. Not all sources of finance are open to every type of business. When you know how much money you need to start up or to grow a business and what you need that money for, you’re in a better position to make an informed choice about the best way to structure your business. If you need to raise large sums of money from the outset for research and development, for example, then a limited company may be your only realistic option, with its access to risk capital. And if you’re nervous about embroiling your finances with other people’s, a partnership isn’t an attractive option.

In general, the more money you require and the riskier the venture, the more likely it is that a limited company is the appropriate structure.

The good news is that you can change your legal structure at more or less any time. Even if you go the full distance and form a company and get it listed on the stock exchange, you can delist and go private. Richard Branson (Virgin) and Alan Sugar (Amstrad) have both gone down this route. That’s not to say you’ll find it easy to dissolve partnerships or shut down companies, but you can do it.

Both your accountant and your lawyer can help you with choosing your legal form. The types of business structures and some of their advantages and disadvantages are shown in Table 5-2.

Table 5-2 Pros and Cons of Various Organisational Structures

Going into Business by Yourself

You may want to develop your own unique ideas for a product or service, and if so, setting up your own business from the drawing board may be your only option. You may want to start a home-based business that you can run in your own time. You may want to start a business because you want to do things the right way, after working for an employer who goes about things in the wrong way.

Doing things your own way is much easier if you’re working alone, rather than, say, buying someone else’s business that already has its routines and working practices established.

Advantages

Working for and by yourself has several things going for it:

• It may be possible to start the business in your spare time. Doing so allows you to gain more confidence in the future success of your proposed venture before giving up your job or pumping your life savings into the business.
• If you’ve limited money to invest in your new venture, you may not need to spend it all at the start of the project. If you’re working on your own, it also means that if things do start to go wrong, restricting the losses is easier.
• Starting a business isn’t just about money. Setting up and running a successful business has the potential to give you a feeling of personal achievement, which may not exist to quite the same extent if you buy someone else’s business, for example.

Disadvantages

Going it alone isn’t all fun and games. Some of the disadvantages include the following:

• Your business will take time to grow. It may not be able to support your current personal financial obligations for many months or years.
• A lot of one-off administration is involved in setting up a new business, such as registering for VAT and PAYE (pay as you earn, or income tax), getting business stationery, setting up phone, fax and Internet connections at your trading premises and registering your business name, in addition to actually trading.

  These tasks can be time consuming and frustrating in the short term, and costly in the long run if you get them wrong. Unfortunately, you can’t delegate these tasks easily and getting other people to do them can be expensive. If you buy a business or take up a franchise, these basic administrative tasks should have already been dealt with.

• You’ve no one to bounce ideas off, or to share responsibility with when things go wrong.
• As a result of the perceived riskiness, generally you may have more difficulty borrowing money to fund a start-up than to invest in an established, profitable business.

Settling on sole-trader status

The vast majority of new businesses are essentially one-man (or one-woman) bands. As such, they’re free to choose the simplest legal structure, known by terms such as sole trader or sole proprietor. This structure has the merit of being relatively formality free and having few rules about the records you have to keep. As a sole proprietor, you don’t have to have your accounts audited or file financial information on your business.

If you’re a sole trader, no legal distinction exists between you and your business. Your business is one of your personal assets, just as your house or car is. It follows that, if your business should fail, your creditors have a right not only to the assets of the business but also to your personal assets, subject only to the provisions of local bankruptcy rules (these rules often allow you to keep only a few absolutely basic essentials for yourself and family). You may be able to avoid the worst of these consequences by distancing your assets.

The capital to start and run the business must come from you, or from loans. In return for these drawbacks you can have the pleasure of being your own boss immediately, subject only to declaring your profits on your tax return and if necessary applying for a trade licence. (In practice, you’d be wise to take professional advice before starting up.)

Often people who start up on their own don’t have enough money to buy into an existing operation, so the do-it-yourself approach is the only alternative.

Building up to Network Marketing

Network marketing, multilevel marketing (MLM) and referral marketing are the names used to describe selling methods designed to replace the retail outlet as a route to market for certain products. Although referral marketing has been around since the early part of the last century, for many people this type of marketing is still unfamiliar territory.

Network marketing is one way of starting a profitable, full-time business with little or no investment; and also a method of starting a second or part-time business to run alongside your existing business or career. Network marketing is one of the fastest-growing business sectors. Industry turnover has grown from £1 billion ten years ago to £2 billion today.

In most cases, network marketing involves selling a product or service that a parent company produces and supplies. You take on the responsibilities of selling the products and introducing other people to the company. You get paid commission on the products/services you sell yourself and a smaller commission on the products/services that the people you’ve introduced to the company sell. In addition, you often get a percentage commission based on the sales of the people that the people you introduced to the company also introduce, and so on.

Advocates of network marketing maintain that, when given identical products, the one sold face to face (without the cost of maintaining a shop and paying employees and insurance) is less expensive than the same product sold in a store. Additionally, network marketing fans believe that buying a product from someone you know and trust makes more sense than buying from a shop assistant behind a retail counter.

A wide variety of good-quality network marketing companies from all over the world exist for you to choose from. They offer products and services from a wide range of industries – health, telecommunications, household products, technology, e-commerce, adult products and so on. Household names include Amway, Avon, Betterware, Herbalife, Kleeneze and Mary Kay Cosmetics. Choose a product or service that you’re interested in, because when it comes to sales nothing beats enthusiasm and confidence in the product.

Evaluating the pros and cons

Like any other type of business, network marketing has its upside and its downside. Some of the positives are:

• Little or no start-up costs: With most companies, the investment in a business kit and a range of sample products rarely exceeds £100. The law governing network marketing doesn’t allow an investment of more than £200 in the first seven days.
• The potential to build a substantial business: By recruiting more and more people to join the company and by those people recruiting more people, your percentages of their sales grow and grow. And, of course, you’re still selling at a high rate yourself.
• A proven business formula: Network marketing has been around since the early 1900s.
• Low risk: Unlike a brand-new business idea that you may have uncovered, network marketing products and services are usually tried-and-tested business concepts. That doesn’t mean they can’t fail, but if you follow the rules, you’re less likely to hit the buffers than you would on your own.
• You often get a great deal of support and advice: The parent company and the person who brought you into the company have a vested interest in helping you succeed because the more you sell, the more money they make.
• Flexible hours: You can sell on a full-time or part-time basis during the hours that suit you and your customers.
• Highly expandable: You don’t have territory restrictions like conventional salespeople, and with e-commerce capabilities most parent companies can supply to many countries.
• Location: You can run the business from your own home.
• Personal development: You build your confidence and increase your communication skills.

Again, as with any business, network marketing isn’t all good. The following list shows some of the disadvantages:

• Restrictions on your business practices may exist; for example, recruitment, advertising and so on.
• Your business relies heavily on the success of one parent company and its ability to deliver its products/services on time.
• You may not feel comfortable selling to your friends or to strangers.
• Even the best network marketing companies may be thought of as pyramid schemes – see the next section.

One characteristic of network marketing that leads to its all-too-frequent excesses is that everyone can get in for little money upfront; thus, everyone does get in.

Distinguishing pyramids from network marketing

Pyramid selling schemes are sometimes disguised to look like network marketing schemes, but commonly have the following characteristics:

• They encourage participants to make substantial investments in stocks of goods, by offering rewards to participants for getting others to do the same.
• They make little reference to direct selling and the need to achieve consumer sales. Instead, they imply that the main source of rewards comes from getting others to make substantial initial investments.
• They don’t offer contracts to participants, nor cancellation rights or the opportunity to buy back unsold goods – all of which are required under UK law.

Quality network marketing companies make sense for people who really believe in a particular product and want to sell it but don’t want to, or can’t, tie up a lot of money buying a franchise or other business, or who don’t have a great idea of their own. Just remember to check out the network company using trade associations such as the Direct Selling Association (http://dsa.org.uk). You won’t get rich in a hurry, or probably ever. But if you take care, you probably won’t lose your shirt either.

Working with a Limited Number of Other People

Unless you’re the self-contained type who prefers going it alone, you have to work alongside other people to get your business going. Not just suppliers or employees or bankers and the like – everyone in business has to do that to a greater or lesser extent.

The upside of going into business with others is that you’ve someone on your side to talk to when the going gets tough, and it will do from time to time. Two heads are often better than one. Also, you’ve the advantage of extra physical and mental resources when they matter most, from the outset.

However, the equation isn’t one-sided, unfortunately. With other people come other points of view, other agendas and the opportunity to disagree, argue and misunderstand.

Taking on an existing business

If you don’t have a solid business idea of your own, with a clear vision and strategy, you can consider using someone else’s wholly formed business. You can think of such ventures as virtually a business-in-a-box. Just buy it, take it home, open it up and start trading. Of course nothing is quite that easy, but in broad principle that’s what network marketing, franchising and co-operative ventures are all about.

Forming a partnership

A partnership is effectively a collection of sole traders or proprietors. Few restrictions apply to setting up in business with another person (or persons) in partnership, and several definite advantages exist:

• Pooling your resources means that you’ve more capital.
• You bring several sets of skills to the business, hopefully, instead of just one.
• If one of you is unable to work, the business can still carry on.

Partnerships are a common structure that people who started out on their own use when they want to expand.

The legal regulations governing partnerships in essence assume that competent businesspeople should know what they’re doing. The law merely provides a framework of agreement, which applies ‘in the absence of agreement to the contrary’.

In the absence of an agreement to the contrary these rules apply to partnerships:

• All partners contribute capital equally.
• All partners share profits and losses equally.
• No partner shall have interest paid on his capital.
• No partner shall be paid a salary.
• All partners have an equal say in the management of the business.

All these provisions probably won’t suit you, so you’re well advised to get a partnership agreement drawn up in writing before opening for business.

Partnerships have three serious financial drawbacks that merit particular attention:

• If one partner makes a business mistake, perhaps by signing a disastrous contract without the others’ knowledge or consent, every member of the partnership must shoulder the consequences. Under these circumstances, your personal assets can be taken to pay the creditors even though the mistake was no fault of your own.
• If a partner faces personal bankruptcy, for whatever reason, his creditors can seize his share of the partnership. As a private individual you aren’t liable for your partner’s private debts, but having to buy him out of the partnership at short notice rather than gaining an unwanted replacement may put you and the business in financial jeopardy.
• If one partner wants to quit the partnership, that partner will want to take the value of his part of the business with him. The remaining partner(s), in effect, has to buy out the partner who’s leaving. The agreement you have on setting up the business should specify the procedure and how to value the leaver’s share, otherwise resolving the situation is costly. Several options for addressing this issue exist. Here are a few:
  • The traditional route to value the leaver’s share is to ask an independent accountant but doing so is rarely cost effective. The valuation costs money and, worst of all, it’s not definite and consequently room for argument remains.
  • You can establish a formula; say, eight times the last audited pre-tax profits. This approach is simple but difficult to get right. A fast-growing business is undervalued by a formula using historic data unless the multiple (eight times or whatever) is high; a high multiple may overvalue ‘hope’ or goodwill, thus unreasonably profiting the leaver.

    You can arrive at the multiplier by looking up the performance of a business similar to the one in question that’s listed on a stock market. Such a business has a P/E (price/earnings) ratio published in both its accounts and the financial sections of national newspapers. You calculate the P/E ratio by dividing the share price into the amount of profit earned for each share. For example, if a business makes £100,000 profit and has 1,000 shares, the profit per share is £100. If the share price of that company is £10, its P/E ratio is 10 (100/10). So much for the science, now for the art. Because any business quoted on a stock market is big and its shares are liquid – that is, easy to buy and sell – such a business is considered more valuable than a small private company. In any event, private firms don’t have a published share price. To compensate, you usually discount the P/E ratio by a third. So, using this example, a private firm in the same line of work as the one listed on a stock market would be given a P/E of approximately 7 (2/3 x 10).

  • You can value the assets of the business and use that as a basis for dividing the spoils.

Even death may not release you from a partnership and in some circumstances your estate can remain liable for the partnership’s obligations. Unless you take public leave of your partnership by notifying your business contacts and legally bringing your partnership to an end, you remain liable indefinitely.

Gerard Hogkinson, a professor of strategic management and behavioural science at Warwick Business School, advises:

If you have two people with exactly the same outlook, experience and skill set and the only basis for them going into business together is that they get on, then there is no value added to that partnership. You are just adding a financial burden to the business that need not be there.

Looking at limited partnerships

One option that can reduce the more painful consequences of entering a partnership is to have your involvement registered as a limited partnership. A limited partnership works as follows: one or more general partners must be involved with the same basic rights and responsibilities (including unlimited liability) as in any general partnership. In addition, you can have one or more limited partners who are usually passive investors. The big difference between a general partner and a limited partner is that the limited partner isn’t personally liable for debts of the partnership so long as he plays no active part in the business. The most a limited partner can lose is the amount that he

• Paid or agreed to pay into the partnership as a capital contribution
• Received from the partnership after it became insolvent

The advantage of a limited partnership as a business structure is that it provides a way for business owners to raise money (from the limited partners) without having to take in new partners who are active in the business, or to form a limited company. Often, a general partnership that’s been operating for years creates a limited partnership to finance expansion.

Checking out co-operatives

If making money is much lower on your list of priorities for starting up in business than being involved in the decisions of an ethical enterprise, then joining a co-operative or starting your own is an idea worth exploring.

A co-operative is an autonomous association of people united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically controlled enterprise.

You must have at least seven members at the outset, though they don’t all have to be full-time workers at first.

Like a limited company, a registered co-operative has limited liability for its members and must file annual accounts.

Although the most visible co-operatives are the high-street shops and supermarkets, pretty much any type of business can operate as a co-operative.

If you choose to form a co-operative, you can pay from £90 to register with the Chief Registrar of Friendly Societies. Not all co-operatives bother to register because doing so isn’t mandatory, but if you don’t register, the law regards your co-operative as a partnership with unlimited liability.

You can find out everything you need to know about the size, structure and prospects of co-operatives in the UK in a free 36-page report that you can download from www.uk.coop/document/uk-co-operative-economy-2010.

Finding Your Way to Franchising

Franchising can be a good first step into self-employment for those with business experience but no actual experience of running a business – often the case with those who are looking for something to do following a corporate career.

Franchising is a marketing technique used to improve and expand the distribution of a product or service. The franchiser supplies the product or teaches the service to you, the franchisee, who in turn sells it to the public. In return, you pay a fee and a continuing royalty, usually based on turnover. The franchiser may also require you to buy materials or ingredients from it, which gives it an additional income stream. The advantage to you is a relatively safe and quick way of getting into business for yourself, but with the support and advice of an experienced organisation close at hand.

The franchising company can expand its distribution with minimum strain on its own capital and have the services of a highly motivated team of owner-managers. Franchising isn’t a path to great riches, nor is it for the truly independent spirit, because policy and profits still come from on high.

Although franchising eliminates some of the more costly and at times disastrous bumps in the learning curve of working for yourself, the system is not an easy way to riches. Ninety-one per cent of franchisees report they’re trading profitably, but the number of those claiming high levels of profitability remains low, at around 4 per cent. Still, this performance compares well with the depth of the 1990 recession when just 70 per cent of franchises traded profitably.

Some people make wild claims about how much safer a franchise is when compared to a conventional start-up. The long-established, big franchise chains are relatively safe – though a few big names have got into trouble – but the smaller and newer ones are as vulnerable as any other venture in the early, formative years.

Looking at franchise types

Franchises can be clustered under these three main headings:

• Business franchises: These businesses typically have premises and employees. They require a higher level of investment, typically in the range of £20,000–£120,000, in stock, equipment and premises. Large numbers of business franchises are available in such areas as retailing, food services and business services such as high-street printing shops.
• Investment franchises: Here, you’re talking about initial investments of over £120,000. Hotels and some of the larger and more-established fast-food outlets come into the top range of this category at around £750,000.The essence of this type of franchise is that the franchisee is unlikely to work in the business day to day. People operating investment franchises typically operate several similar franchises in nearby areas.
• Job franchises: These franchises are where you’re buying the rights to operate what’s essentially a one-person business, such as plumbing, building services or a recruitment business. These franchises require a financial investment in the £7,000–£20,000 range and can be described as ‘buying a job’. However, with back-up in the way of training, customer leads, advertising and so on from the franchiser, these kind of franchises are suitable for someone with little capital but who has a specific area of expertise or is willing to be trained in it, such as cleaning or vehicle repair and maintenance services.

Defining a franchise

A franchise agreement is just like any business contract, in that it sets out what each party is expected to do and what can happen if he doesn’t.

The main ingredients of the franchise agreement are

• Permission to use a business name and so be associated with that bigger enterprise
• The right for the franchiser to set and enforce business and product standards, such as the use of ingredients, cooking processes, opening times, staff uniforms and so forth
• An obligation for the franchiser to provide help, training and guidance in all aspects of operating the business
• A definition of how the franchisee is to pay for rights to operate the franchise; for example, royalties on sales, initial purchase fee, marketing levy, mark-up on goods and services provided, and so forth

The British Franchise Association expects its members to follow its code of practice, and you can find out more on its website: www.thebfa.org.

Evaluating a franchise opportunity

Although membership of the BFA and adhering to a code of practice are helpful, they’re not a guarantee of success for your franchise. You should be looking for a shortlist of as many as six opportunities, acquiring as much advice as you can get from franchisers, from franchisees, from your bank and from other professional advisers.

Before deciding on a particular franchise, you must consult your legal and financial advisers, as well as ask the franchiser searching questions such as the following:

• Has the franchiser operated at least one unit for a year or so as a pilot unit in the UK? They must have done so before selling franchises to third parties. Otherwise, how can the franchiser really know all the problems, and so put you on the right track?
• What training and support is included in the franchise package, the name given to the start-up kit provided by the franchiser? This package should extend to support staff over the launch period and give you access to back-up advice.
• How substantial is the franchise company? Ask to see the balance sheet (take it to your accountant if you can’t understand it). Inquire into the track record of the directors (including their other directorships).

Sometimes a major clearing bank offers financial support to buy a particular franchise, which is an encouraging sign that the company is in good financial health. At least you know that the concept is tried and tested and, to some extent, the business is reputable. However, as with everything to do with starting up a business, the buck stops with you.

You can meet franchisers and hear their pitch at one of the dozen or so franchise exhibitions held around the country each year. The BFA Diary page (www.thebfa.org/events/seminars) gives details of dates and venues.

Founding a Larger Company

If your business looks like it needs a substantial amount of money from the outset and will be taking on the risk of customers owing money, then, as with any manufacturing venture, the legal structures in the preceding sections may not be right for you. In this section you can find out about the advantages and disadvantages of going for a limited company, or buying out a company already in business.

Opting for a limited company

As the name suggests, in this form of business your liability is limited to the amount you contribute by way of share capital.

Two shareholders, one of whom must be a director, can form a limited company. You must also appoint a company secretary, who can be a shareholder, director or an outside person such as an accountant or lawyer. You can buy a company ‘off the shelf’ from a registration agent, and then adapt it to suit your own purposes. To do so involves changing the name, shareholders and articles of association and takes a couple of weeks to arrange. Alternatively, you can form your own company.

A limited company has a legal identity of its own, separate from the people who own or run it. So, in the event of failure, creditors’ claims are restricted to the assets of the company. The shareholders of the business aren’t liable as individuals for the business debts beyond the paid-up value of their shares. This lack of liability applies even if the shareholders are working directors, unless of course the company has been trading fraudulently. In practice, the ability to limit liability is restricted these days because most lenders, including the banks, often insist on personal guarantees from the directors. Other advantages include the freedom to raise capital by selling shares.

Disadvantages include the legal requirement for the company’s accounts to be audited and filed for public inspection.

When a company is first registered, it must send to Companies House (www.companieshouse.org.uk), the place where all business details and accounts are kept, a copy of its memorandum and articles of association and Form 10, which contains the address of the company’s registered office and details of its directors and company secretary. The directors’ details are current names, any former names, date of birth, usual residential address, occupation, nationality and other directorships. For the secretary only, the name and address are required. Companies House organises or attends a variety of seminars and exhibitions to support and advise businesses and to support new directors and secretaries. You can find details of these events on the events section of the Companies House website (www.companieshouse.org.uk/about/chEvents.shtml).

Buying out a business

Buying out an existing business is particularly well suited to people who have extensive experience of general business management but lack detailed technical or product knowledge. When you buy an established business, you not only pay for the basic assets of the business, but also the accumulated time and effort that the previous owner spent growing the business to its present state. You can think of this extra asset as goodwill. The better the business, the more the ‘goodwill’ costs you.

Advantages of buying a business include the following:

• You acquire experience and expertise that you don’t have. Learning from the mistakes other people have made in the past is much easier, and almost invariably less costly, than making all these mistakes yourself.
• You gain both access to your potential customers and the credibility of a trading history from the outset, which can save months if not years of hard work in building relationships.
• If the business you buy is already profitable, you can pay yourself a living wage from the outset.
• Bank financing may be easier to acquire for an established business than for a riskier start-up business.

Disadvantages of buying a business include the following:

• You run the risk of acquiring the existing unsolved problems and mistakes of the person who’s selling it.
• Identifying the right potential acquisition and negotiating a purchase can take a long time, and you’ve no guarantee that you’ll succeed at your first attempt.
• The professional fees associated with buying a business can be a significant, though necessary, cost. If you buy a small business, the total professional fees associated with the transaction are a major percentage of the total cost of your investment, perhaps as much as 15 or 20 per cent. Experienced solicitors and accountants are vital to this process. They’re your safeguards to ensure that you know exactly what you’re buying.

Contact these organisations to find out more about buying a business and to see listings of businesses for sale:

• Businesses For Sale (www.businessesforsale.com) has over 64,000 businesses for sale in the UK, as well as listings of firms in Spain, the USA, Australia, Canada, India, Ireland, New Zealand and France.
• Christie & Co (www.christie.com) claims to have the largest database of businesses for sale in Europe. This organisation is the recognised market leader in the hotel, catering, leisure and retail markets, and is also expanding into healthcare.
• Daltons (www.daltonsbusiness.com) has an online database of over 30,000 businesses for sale around the UK and some overseas countries.

Looking at Legal Issues in Marketing

Nothing in business escapes the legal eye of the law and marketing is no exception. If anything, marketing is likely to produce more grey areas from a legal point of view than most other aspects. You have patent and copyright issues to consider, for example.

A number of vital aspects of your business distinguish it from similar firms operating in or near to your area of operations. Having invested time, energy and money in acquiring these distinguishing factors, you need to take steps to preserve any benefits they provide you with. Intellectual property, often known as IP, is the generic title covering the area of law that allows people to own their creativity and innovation in the same way that they can own physical property. The owner of intellectual property can control and be rewarded for its use, and this control encourages further innovation and creativity.

The following four organisations can help direct you to most sources of help and advice across the entire intellectual property field. They also have helpful literature and explanatory leaflets and guidance notes on applying for intellectual property protection:

• Intellectual Property Office (www.ipo.gov.uk)
• European Patent Office (www.epo.org)
• US Patent and Trade Mark Office (www.uspto.gov)
• World Intellectual Property Association (www.wipo.int)

I cover the most common types of intellectual property in the following sections.

Protecting your intellectual property in the UK may not be of much help in a global world. This lack of protection can be a problem, particularly when it comes to patents where disclosure is a part of the application process. Your details and those of your idea will be included in the government’s searchable patents journal when it publishes your application. Both are available to the public on its website and can be found using most standard search engines. The Intellectual Property Office provides guidance on getting worldwide protection for your IP at www.ipo.gov.uk/types/patent/p-manage/p-abroad/p-worldwide.htm.

Naming your business

The main consideration in choosing a business name is its commercial usefulness. You want one that lets people know as much as possible about what your company does. So choose a name that conveys the right image and message.

Whichever business name you choose, it has to be legally acceptable and abide by the rules of the Business Names Act 1985. Detailed information on this subject is available from the Business Names section at the Companies House website. Go to www.companieshouse.gov.uk and click on Guidance and then Incorporation and Names.

Looking at logos

You don’t have to have a logo for your business, but it can build greater customer awareness. A logo may be a word, typeface, colour or shape. The McDonald’s name is a logo because of its distinct and stylistic writing. Choose your logo carefully. It should be easily recognisable, fairly simple in design and able to be reproduced on everything associated with your business. As far as the law is concerned, a logo is a form of trademark (see ‘Registering a trademark’, later in this chapter).

Protecting patents

Patents can be regarded as contracts between inventors and the state. The state agrees with the inventor that if he’s prepared to publish details of his invention in a set form and if it appears that he’s made a real advance, the state then grants him a monopoly on his invention for 20 years. The inventor can use the monopoly period to manufacture and sell the innovation; competitors can read the published specifications and glean ideas for their research, or they can approach the inventor and offer to help to develop the idea under licence.

If you want to apply for a patent, you mustn’t disclose your idea in non-confidential circumstances. If you do, your invention is already ‘published’ in the eyes of the law, and this fact can invalidate your application. Ideally, you write down the confidentiality of the disclosure you make in a confidentiality agreement, which the person to whom you’re making the disclosure signs. The other way is to get your patent application on file before you start talking to anyone about your idea. You can talk to a chartered patent agent in complete confidence because they work under strict rules of confidentiality.

The process of filing an application, and publishing and granting the patent takes two and a half years. The associated costs can be high: subject matter searches cost upwards of £500, validity searches from £1,000 and infringement searches from £1,500. The relevant forms and details of how to patent are available from the Patent Office at www.ipo.gov.uk, and you can find more information in Trevor Baylis Brands’ and Henri Charmasson’s Patents, Copyrights & Trademarks For Dummies (Wiley).

Registering a trademark

A trademark is the symbol by which the goods of a particular manufacturer or trader can be identified. It can be a word, a signature, a monogram, a picture, a logo or a combination of these.

To qualify for registration the trademark must be distinctive, must not be deceptive and must not be capable of confusion with marks already registered. Excluded are national flags, royal crests and insignia of the armed forces. A trademark can only apply to tangible goods, not services (although pressure is mounting for this ruling to be changed). To register a trademark, you or your agent should first conduct preliminary searches at the Trade Marks Branch of the Patent Office to check that no conflicting marks are already in existence. You then apply for registration on the official trademark form and pay a fee (currently £200, or £170 if you apply online). Registration is initially for ten years. After this time, you can renew for further periods of ten years at a time, with no upper time limit.

If you’ve been using an unregistered trademark for some time and it can be construed that customers closely associate it with your product, the trademark has acquired a ‘reputation’ that gives it some protection legally, but registration makes it much simpler for the owner to have recourse against anyone who infringes the trademark.

Detailing your design

You can register the shape, design or decorative features of a commercial product if it’s new, original, never published before or – if already known – never before applied to the product you have in mind. Protection is intended to apply to industrial articles to be produced in quantities of more than 50.

Design registration only applies to features that appeal to the eye – not to the way the article functions.

To register a design in the UK, you apply to the Design Registry at www.ipo.gov.uk/types/design.htm and send a specimen or photograph of the design plus a registration fee (currently £60 plus £40 for each additional design). To protect your design outside the UK, you generally have to make separate applications for registration in each country in which you want protection.

Controlling a copyright

Copyright gives protection against the unlicensed copying of original artistic and creative works – articles, books, paintings, films, plays, songs, music and even engineering drawings. To claim copyright, the item in question should carry the symbol © with the author’s name and date. No other action is required to take out copyright, if that copyright is relevant to your business. For further information, you can access the Copyright Service through the Patent Office website (www.ipo.gov.uk/types/copy.htm).

Copyright doesn’t last forever. Its duration depends on the type of copyright involved and can be anything from 25 to 70 years after the creator’s death.

Abiding by fair business rules

The whole way in which businesses and markets operate is the subject of keen government interest. Don’t, for example, gang up with others in your market to create a cartel, in which you all agree not to lower your prices or to compete with each other too vigorously. Any such action may be brought to the attention of the Office of Fair Trading (OFT; www.oft.gov.uk). The OFT’s job is to make markets work well for consumers. Markets work well when businesses are in open, fair and vigorous competition with each other for the consumer’s custom.

The OFT

• Ensures that consumer legislation and regulations are properly enforced
• Takes action against unfair traders
• Encourages codes of practice and standards
• Offers a range of information to help consumers understand their rights and make good choices
• Liaises closely with other regulatory bodies that also have enforcement powers

Setting terms of trade

All business is governed by terms of trade, which are in turn affected by contractual relationships. Almost everything done in business, whether it’s the supply of raw materials, the sale of goods and services or the hire of machinery, is executed under contract law. This is true whether the contract is in writing or verbal – or even merely implied.

Only contracts for the sale of land, hire purchase and some insurance contracts have to be in writing to be enforceable. To make life more complicated, a contract can be part written and part oral. So statements made at the time of signing a written contract can legally form part of that contract. For a contract to exist, three events must take place:

• An offer
• An acceptance
• A consideration – some form of payment

When selling via the Internet or mail order, the contract starts when the supplier ‘posts’ an acceptance letter, a confirmation or the goods themselves – whichever comes first.

Goods purchased via the Internet or mail order are also covered by the Distance Selling Regulations, under which customers have seven working days after they’ve received the goods to change their minds and return them. They don’t need a reason and can get a full refund.

You must also give customers

• Information about the company they’re dealing with, such as the business name, registered and trading addresses and directors’ names
• Written confirmation of the order – by fax, letter or email
• A full refund if the goods don’t arrive by the date agreed in the original order; if no date was agreed, they must be delivered within 30 days
• Information about cancellation rights
• Protection against credit card fraud

You have to meet certain standards by law for the supply of goods and services. Over and above these, you need your own terms and conditions to avoid entering into ‘contracts’ you didn’t intend. You need help to devise these terms. The following four basic propositions govern your conditions:

• The conditions must be brought to the other party’s attention before he makes the contract.
• The last terms and conditions specified before acceptance of an offer apply.
• If any ambiguity or uncertainty exists in the contract terms, they’re interpreted against the person who inserted them.
• The terms may be interpreted as unreasonably unenforceable, in breach of various Acts of Parliament.

The Office of Fair Trading (www.oft.gov.uk) and the Trading Standards Institute (www.tradingstandards.gov.uk) can provide useful information on most aspects of trading relationships.

Describing your goods

You can’t make whatever claim you like for the performance of your goods or services. If you state or imply a certain standard of performance for what you’re selling, your customers have a legally enforceable right to expect that to happen. So if you state that your new slimming method not only makes people lose weight but also makes them happier, richer and more successful, you’d better deliver on all those promises.

The Trade Descriptions Acts and related legislation make it an offence for a trader to describe goods falsely. The Acts cover everything from the declared mileage of second-hand cars to the country of manufacture of a pair of jeans.

The Trading Standards Service operates at county level throughout the UK to ensure that trading laws are met. You can contact your branch by phone or via the website (www.tradingstandards.gov.uk).

Dealing with payment problems

Unless you’re able to insist on payment before you send your product or supply your service, getting paid isn’t always as simple as sending a bill and waiting for the cheque. Customers may dispute the bill, fairly or unfairly.

A government service gives you an opportunity to collect money when you find a regular court too expensive. True, for particularly small cases the process isn’t always cost effective, and occasionally you have problems collecting on your judgement. But the Small Claims Court, as this service is sometimes referred to, should still be part of your business’s collection strategy. (See https://www.gov.uk/make-court-claim-for-money/overview for more info.) The Department of Justice also offers a mediation service, providing members of the public and businesses with a simple, low-cost method of resolving a wide range of civil disputes out of court. Costs range from £50 to £425, plus VAT, for disputes over amounts between £5,000 and £50,000. For details visit www.civilmediation.justice.gov.uk.

One other route to less painful debt recovery (or problem resolution) is to go to arbitration. That’s where an independent person listens to both sides of the case and makes a decision based more on common sense, fairness and practicalities than merely on the law. Arbitration is a cheaper, quicker and less intimidating process. You can find out all about the process and locate an arbitrator from the Chartered Institute of Arbitrators (www.ciarb.org).