To be limited or not, that is the question

One of the major decisions you need to take once you decide upon starting a company is its legal structure. I touched on my decision in the first blog post, but I thought it would be worth going over the different options in greater detail, and why I decided to make the decision I did.

First and foremost, there are four main types of companies (although these can be split further down, these are the overarching entities): sole trader, partnership, private limited company and public limited company.

The company’s legal structure defines how it fundamentally operates, in terms of who owns the profits (or losses), tax system, how funds can be raised and other legal bits and bobs.

  • Sole Trader: As the name suggests, you start the business on your own. You file your taxes under the self-assessment tax system, and you are responsible for all the debts (called unincorporated), but you also take all the profits.
  • Partnership: Again, the name gives this one away; two or more people form the company. There are a few types of partnerships, but without wanting to get into the nitty gritty, these are governed by a ‘partnership agreement’, which defines profit sharing, what happens if a new partner joins or an old one leaves, and other details linking the partnership together. Again this is unincorporated, so the people who founded the business are responsible for any losses incurred.
  • Private Limited Company: Unlike the previous two options, this creates an incorporated business. This essentially means that the company has become a separate legal person. All profits and losses are ‘owned’ by the company, and there is better continuity if one of the Directors leaves for whatever reason. This system also makes it easier to attract funds from outside investors, and generally gives better options for expansion in the future, whilst keeping full control.
  • Public Limited Company: The shares for these companies are available for public sales (unlike all previous options). This obviously makes it a lot easier to attract investors; however, you need a substantial amount of capital in order to start this type of business up, and with every share you sell, you lose some control. This is an incorporated company, so again, losses are limited.

Although the above may sound complicated, you can quickly identify the type of company you want to start by asking yourself a few simple questions: how much funding do you have, how much control do you want to keep, what are your plans for expansion, how easy do you want to make it to set up and file tax returns and most importantly do you want to be responsible for losses.

The final comment refers to whether the company is incorporated or not. Essentially if it’s incorporated, your liability is limited to the amount unpaid on shares you hold, so you’re a lot more secure. If it’s unincorporated, in theory, if it all goes wrong, you could lose everything.

I went for a private limited company, rather than a partnership. This was mainly due to the fact that private limited companies tend to have a greater status, so would be better for us when dealing with other companies. Although our business is currently small scale, creating this ‘legal person’ was also quite an advantage, whilst also keeping control of the company and allowing for scope to grow if that happens.

This can all boggle the mind, and despite trying to simplify this as much as possible, I’m conscious that there is still a lot of business jargon. But before creating a company, asking yourself some of the questions above are essential in identifying the right legal entity for you, and then the rest will follow.

The Business Plan

While all this networking and idea bouncing was going on, I was still developing the business plan. Once I was satisfied with the model, I met with Chris Dowd, a Chaplain at Aston who had previous experience as a business consultant. He added massive value, particularly around pricing. He felt that charging entertainment venues to promote their services on our site was a dead end.

We decided upon the structure of the business. We went for a private limited company to give us more security, which we also thought would stand us in better stead from a reputational point of view once we started to approach companies. We registered the web domains and suddenly everything was a lot more official.

By this time we were in early 2012, and although the legal entity of the business had been created, the rest wasn’t really progressing as quickly as we’d wanted. We had set an Easter 2012 launch date. But with no operational website, and only ideas and concepts, we decided that this wasn’t going to happen. We suffered another setback when Prab and I sat down, and came to the conclusion that he didn’t really have the time to give this project the full commitment that he would like to…so then we were down to 2 Directors, with James filling the graphics and design void.

After the next few weeks, I knuckled down and made changes to the business plan. We had decided that we could add more value to the company by creating more streams. We knew that students were desperate for more money and experience in the current climate of rising tuition fees and mounting unemployment rates. So we added the employability string to our bow, quickly followed by a market research element. This also created the possibility of increased revenue, which was something which we were looking at as a potential issue. From Phil’s original comment about focusing too much on a niche, I knew that the wider the market potential the better, although the need for realism had been highlighted to me on several occasions.

We set up a meeting with an accountant and showed him our projections, which he felt were very realistic and he liked the business model. We set up a bank account, and after several frustrating weeks thanks to mistakes made by HSBC, we eventually received our cards through the post.

The business plan itself is still evolving, with constant changes being made when new ideas come to mind. For us, that has really been the key; making sure that it is a living document, not static, allowing for constant idea development and not restricting yourself just because it is no longer the creation you initially had in mind.

The Concept

As with many business ideas, the idea evolved from its conception. Originally I had the idea to develop a magazine in the same vein as The Big Issue which would be a social enterprise promoting entertainment in the Birmingham area, being written by, and then giving all proceeds to, students with disabilities, available as both a hard copy magazine and electronic.

At this time, I was working as a sabbatical officer at Aston Students’ Union, and took full advantage of the business expertise available within the University. I met with the Pro-Vice-Chancellor Business Partnerships and Knowledge Transfer, Dr Phil Extance, who very kindly gave me 30 minutes of his time. He gave me a good insight into current trends in the magazine industry, and how advertising revenue (which would be the main stream of income) was diminishing and that I was also massively restricting my market of writers. However, he liked some aspects, and thought that there could be some value in it. He also gave me the contact details of Alison Sharpe, a lady who ran the entrepreneur programme at Aston Science Park.

I went away, developed the idea and saw how I could add value and create a USP. By the time I met Alison, I had the beginnings of business plan – although basic. She was a tremendous help, alerting me to the possibility of the BSeen scheme they offer at Aston, which provides an ‘incubator’ programme, giving access to mentors and support. She gave me a few tips to evolve the idea. The business then became a lot less about the costly matter of printing hard copies of magazines, and more about interactive online features, meaning there was less risk.

A friend of mine, Dom Smith (who runs a music magazine in York called Soundsphere, and has since been awarded an Entrepreneurial Excellence Award in the Disability category in the National Diversity Awards, so I figured knew a thing or two!), then gave me some input. He told me that I should definitely find at least one business partner, as setting it up on my own would be exhausting and isolating.

Earlier that year (2011) I had received a University award which brought with it £1000 – something I decided to use as seed capital. I then set about finding some business partners. Two friends of mine who I’d come across through the Students’ Union, Prab and James, leapt out as ideal candidates – one with design experience, the other with website construction experience, both of which were things that I couldn’t do on my own successfully.

Through links I had made through networking, mainly thanks to the Science Park, I met with a copyright specialist, who gave me a good idea of how to protect the business’ intellectual property.

Networking and asking for as much help as possible was definitely a defining moment, at which point I want to thank Phil, Alison and Dom.