Business Plan – Legal and Financial Aspects


For a business to run smoothly and have security for its future, a business leader needs to cover all the financial and legal aspects involved in running a business. Without having an understanding of this, the business will surely fail. These areas help protect the company and its employees as well as its future success in a sense of knowing what areas it needs to improve on financially as well as areas on legal matters that will not be an issue within the business. To cover all these I shall first describe and explain the different types of businesses, such as a sole trader, partnership and a limited company and go on to explain their different legal aspects as well as the legal aspects in general, things like; contracts,  human rights, trademarks and employment laws.

Sole Trader

A sole trader is a person who sets up and owns their own business. They may have other people working for them but they will always be the owner. So success all depends on the owner himself and depending on his abilities the progression of the business or the downfall of the business from irrational decisions. A benefit of being a sole trader is that after all tax has been deducted, what’s left is entitled to the owner. the benefit of having full control over business is that decision making is easier and quicker and decisions don’t need to be discussed like in a partnership or limited company with other co-owners. However this could also be seen as a downside because decisions are only made by the owner it could be difficult to make the right decision and there is nobody else to help with working through tough decisions.

The major setback of being a sole trader is the fact that the owner has unlimited liability which means that the law sees the owner and the business as one, this suggests that if the business should go into debt, the owner will be liable towards paying those debts back. Also if a customer sues the business, they sue the owner. A lot more input is needed from the owner as it is one person and the workload of the owner cannot be shared like in a partnership.The positive legal aspect of a sole trader is that all the info is kept private and so the owner can keep the business very personalised and push innovation, however once business is no longer able to thrive from the owner from causes uncontrollable such as death, the business ceases to continue.

Partnership

A partnership is a company owned and run by two or more people. There are two different types of partnerships; general partnerships and limited partnerships. In a general partnership, the partners manage the company and take on the responsibility for the partnership’s debts and other obligations. A limited partnership has both general and limited partners. The general partners own and operate the business and assume liability for the partnership, while the limited partners serve as investors only; they have no control over the company and are not subject to the same liabilities as the general partners. limited partnerships are generally not the best choice for a new business because of all the required filings and administrative complexities. Partners are able to share the investment and success as well as the failure of the business. A major advantage of a partnership  is the tax “treatment”, this means a partnership doesn’t pay tax on its income but “passes through” any profits or losses to the individual partners.

Personal liability is a major concern in a general partnership. Like sole traders, partners are personally liable for the partnerships obligations and debts therefore each partner has the responsibility to act on behalf of the partnership. Partnerships are generally more expensive to set up and run because they require more legal and accounting services. Therefore a partnership agreement should be drawn up to show how business decisions should be made, how disputes should be settled  and how to resolve a buyout. The agreement should address the purpose of the business and authority and responsibility of the partners.

Limited Company

A limited company is when an organisation is set up in order to run the business. It is responsible in its own right for everything it does and its finances are seen as separate from the finances of the owners, suggesting it has limited liability. Any profit a limited company makes is owned by the company after it pays corporation tax.

Every limited company has “members”, these people or organisations own shares in the company. Shares are seen as a percentage of the rights to the company. Directors are responsible for running the company and the shareholders responsibility’s for the companies financial liabilities are limited to the value of shares they own.

A unique aspect of a group of people working together is called a Co-operative. These businesses come together to meet common needs and aspirations of its members, sharing ownership and making decision making based in democracy. They are not about making big profits for its shareholders but instead their goals are to create value for its customers. This is what gives it its unique characteristic as a business.

Limited Liability

This is a type of liability that does not exceed the amount invested in a partnership or limited company. It has a big advantage with investing in publicly listed companies. While a shareholder can participate wholly in the growth of a company, the shareholders liability is restricted to amount invested within the business. In a partnership, the limited partners have limited liability while the general partners have unlimited liability. The limited liability feature protects the investors personal assets from the risk of being in debt to any creditors in case the company becomes insolvent.

In the context of a private company, incorporation can provide its owners with limited liability, since an incorporated company is treated as a separate and independent legal entity. Limited liability is especially desirable when dealing in industries that can be subject to massive losses, such as insurance.

Memorandum of Association

This is the document that governs the relationship between the company and the outside. It is one of the documents required to incorporate a company in the United Kingdom, Ireland, India, Bangladesh, Pakistan and Sri Lanka, and is also used in many of the common law jurisdictions of the Commonwealth.

It is basically a statement that the subscribers wish to form a company, have agreed to become members and, in the case of a company that is to have a share capital, to take at least one share each.

When considering which legal status a business owner wants his/her business to be, the next thing to consider, which is extremely important, is the legal aspects of a business. Without these the business would be seen as illegal and not compliant to laws of the country.

Health & Safety

This is a crucial area of any business. A business needs to ensure they abide by the local health and safety regulations. They are in place not only to protect customers but also safeguard the business against any lawsuits or court actions. If five or more members of staff are employed the business must have a drawn up health and safety policy in place. Staff need to be trained in health and safety duties, and the business would be responsible for any effect it may have on the health and safety of employees and members of the public.

A business must have basic requirements for minimising the risk of fires. These include:

  • Fire resistant doors and walls.
  • Fire alarms
  • Emergency Lighting
  • Staff training

The business must ensure premises meets standards set by the regulations of the country and fire risk assessments must be carried out, the assignment should incorporate:

  • Identification of potential fire hazards
  • Identify any people who may be at a particular risk.
  • Evaluate existing risks and take necessary stops to remove or reduce risk.
  • Draw up an emergency plan that staff are familiar with
  • Review assessment regularly, particularly of any changes increase risk.

Employment law and age

This is necessary for a business to ensure compliance of age and employment related laws applicable to the type of business. It is the body of law that governs the relationship between employer and employee. It is a key component of the business, therefore it is the employment rights that are bestowed on the employer.

It amounts to a code of conduct by which employers must abide by and acts to protect workers against various ways of discrimination. It also dictates when an employer is justified to dismiss an employee. Failure to abide by employment law by a company could result in serious repercussions.

Specialised employment solicitors with the knowledge of employment law will be called to represent both sides of an employment tribunal if the need of a tribunal ever happened.

Planning Permission

This is permission to be allowed to build on land or change the use of land or building/s. The occupier of any land or building will need a title to that land or building, this represents ownership , but will also need a planning title. Certain types of operation such as routine maintenance of an existing building are specifically excluded from the definition of development.

Solicitor and Accountant

A solicitor is a lawyer who traditionally deals with any legal matter including conducting proceedings in court

An accountant is a practitioner of accounting, which is the measurement, disclosure or provision of assurance about financial information that helps managers make decisions about allocating resources.

Legal Liabilities

Legal liability is a term applied to being legally responsible for a situation,and has a contractual agreement involved. A business has to be legally responsible for any situation, especially if terms of the contract is not fulfilled. It is the companies obligation to act responsibly or face compensatory penalties.

Insurance

This is the protection of the company from any risks that the company might face. Its like normal car or house insurance except that its insuring your company. This helps secure growth and progression of the business and that any set backs wont keep the business from being unable to succeed.

Most people are familiar with insurance for their personal belongings, homes and cars. This coverage protects a person financially in case of an accident or disaster to their belongings, homes or cars. We are familiar with these types of insurance because it is natural for most people to realize that they would be unable to replace their home tomorrow if there was a fire or to replace their car if there was an accident.

The same principle applies to business insurance. The principle is one of risk. There are risks that are so destructive that it makes sense to plan ahead and manage the risk, sometimes these risks may never happen , but it is always good to have a financial plan in case they do happen. In our personal lives these risks are often more easily foreseeable.

For our businesses, however, a company might not consider risk or believe that the risks cannot be managed and so turn a blind eye hoping that nothing happens. They forget that if the business is not operating, there is no cash flow. Business insurance involves spreading and managing the risk among many business owners. Insurance companies take in  payments from many covered businesses, invest those payments, and create a pool of money to pay out to a business if that business has a covered loss. Insurers have developed mathematical models to determine what chance there is of a risk occurring and what premiums the insurer must charge to stay in business and make a profit. Insurers have also developed around eight to nine general categories of losses that seem to happen with more frequency. The insurers developed particular policies to address those types of losses.

Software license 

This is a legal instrument governing the use or redistribution of software. A typical software license grants a user permission to use one or more copies of software in ways where such use would be seen as copyright infringement of the software. They typically vontain provisions which allocate liability and responsibility between the parties entering into the agreement.

IP strategy

This is the business game-plan. It generally should not be complicated and should be something for the company to turn to when planning. From a legal perspective, there are four types of intellectual property. The four legally-defined categories of intellectual property are:

  1. Patents; when the company registers the invention or idea with the government. The company would gain the legal right to exclude anyone else from manufacturing or marketing it. Patents cover tangible things. They can also be registered in foreign countries, to help keep international competitors from finding out what the company is doing. Once you hold a patent, others can apply to license your product. Patents can last for 20 years.
  2. Trademarks; A trademark is a name, phrase, sound or symbol used in association with services or products. It often connects a brand with a level of quality on which companies build a reputation. Trademark protection lasts for 10 years after registration and can be renewed.
  3. Copyrights; Copyright laws protect written or artistic expressions such as – novels, poems, songs or movies. A copyright protects the expression of an idea, but not the idea itself. The owner of a copyrighted work has the right to reproduce it, to make derivative works from it, like movies based on a books, or to sell, perform or display the work to the public. The material doesn’t need to be registered to hold a copyright, but registration would be important if the company decides to sue for copyright infringement. A copyright lasts for the life of the author plus another 50 years.
  4. Trade secrets; A formula, pattern, or compilation of data that gives the user an advantage over competitors can be seen as a trade secret. To protect the secret, a business must prove that it adds value to the company, that it is actually  a secret and that it benefits the company in some way, and that appropriate measures have been taken within the company to safeguard the secret, such as restricting knowledge to a select handful of executives. Coca-Cola, for example, has managed to keep its formula under wraps for more than 117 years.

But IP can also be something broader and less tangible than these four protected classes: it can simply be an idea. If I have a eureka moment during my morning shower and then apply my new idea to my business, that could also be seen as intellectual property too.

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