Legal considerations when incorporating a business

Many smaller businesses find it beneficial to operate under a simple unincorporated structure, such as a partnership, or as a sole trader.

However, whether due to growth or for tax reasons, some business get to a stage where the benefits of incorporation and limited liability, either as a limited company or limited liability partnership (LLP) become appealing.

When deciding to incorporate your business, it is important to get appropriate tax advice, and to structure the incorporation correctly.

The term ‘incorporation’ in these circumstances is actually something of a misnomer. Where a business is to be run from a corporate entity, such as a limited company or LLP, what is actually happening is that the corporate entity purchases the business from the previous owner.

As with any other business purchase, there are certain key steps which need to be undertaken to ensure there are no breaks in trading, and to ensure correct transfer of obligations and liabilities. Some of these are:

Contracts

Any contracts which the business has entered into, whether customer or supplier contracts, need to be transferred to or novated by (entered into afresh) the new corporate entity. This requires careful due diligence as some contracts may contain prohibitions on transfer, or allow a party to cancel the contract completely in the event of transfer of change of ownership, and almost certainly the consent of the other party will be required. Moreover, if the intention is to limit the liability of the business owner, a failure to transfer the contract may result in the individual owner still being liable under the terms of that contract.

Property

You should consider whether or not any properties owned or used by the business should be transferred. This is particularly relevant where the premises are leased, as failure to effect a transfer for assignment could lead the tenants to be in technical breach of the terms of their lease. Where a property is not transferred, you should consider whether or not a lease needs to be put in place between the owner and the new corporate entity to reflect the actual occupation.

Employees

As with all business transfers, the employee protection regulations (TUPE) will apply, and you should take care to ensure that the necessary steps are followed. As an example, a failure to inform and consult with your staff about the incorporation could lead to a liability to pay compensation of up to 13 weeks’ pay per employee. Extra care should be taken where there is a pension scheme in place.

Goodwill and intellectual property

Goodwill and intellectual property (including web addresses) are property much like any other asset. However, as ‘intangible’ assets, they cannot be transferred, save by way of an assignment. Where no money is actually changing hands, then such an assignment should be executed by way of a deed.

For more advice on incorporating a business, or any corporate or commercial legal matter, please contact David Filmer on 01772 258321 or David.Filmer@harrison-drury.com