So you’re ready to go. market research done, business plan drafted, finance and supports in place. But there are a few small hurdles that could still trip you.
You ought to consider each of the following and build them into your business plan:
• Bank account.
• Legal structure.
• Tax registration.
• Company administration.
• Accounting systems.
• Quality certification.
At least one bank account is an essential for any business, however small. Don’t be tempted to run your business through your own personal bank account ‘until it gets off the ground’. That is a recipe for disaster. Open a separate bank account for your business as soon as (or before) you begin to trade.
A limited company usually needs to pass a resolution of the Board of Directors to open a bank account. The steps involved are:
• Ask your bank manager for a copy of the form of resolution that they require. This is called a Bank Mandate because it mandates (that is, authorises) the bank to carry out the instructions of the directors regarding the operation of the account.
• Hold a meeting of the directors of the company.
• Decide what instructions you want to give the bank regarding who is authorised to sign cheques on behalf of the company, and how often you want to receive statements.
• Propose the resolution in the form required by the bank – see the mandate form for the wording – and have it adopted by the directors at a formal Board meeting.
• Complete the mandate form. Usually this is in the format of a request to the bank to open an account, and certifies that the resolution, in the prescribed wording, was passed at a meeting of the directors held on the date noted.
• Get sample signatures from each of the people authorised to sign cheques on be half of the company.
• Return the mandate form and sample signatures to your bank manager.
• Give the bank manager a copy of your company’s Memorandum of Association and Articles of Association. These will be kept for the manager’s files.
• Show the original of the company’s Certificate of Incorporation to your bank manager. A copy of this will be taken for the manager’s files and on the copy will be marked the fact that the original has been seen by the manager. You will not be asked for, and you should not give the bank manager, the original Certificate of Incorporation. (The only exception to this is in the larger city branches where the documents needed to open your bank account go to the Securities department for checking. In this case, your bank manager should give you a receipt for the certificate and give you a date when you can return to collect it.)
• Have available some money to lodge to the new account.
Depending on the bank and branch, it may take a few days or a few weeks to clear all the paperwork associated with opening your company’s bank account. Allow for this in your planning.
If you need immediate access to the funds you are lodging, your bank manager can usually arrange for temporary cheques to be made available while a chequebook is being printed.
You have most likely already made a choice as to your legal structure. Now you need to implement it.
Setting up as a sole trader
In most countries (check your local situation with an experienced adviser), you automatically become a sole trader by starting up a business. Setting up as a sole trader needs almost nothing by way of legal formality. A further advantage of being a sole trader is that apart from normal tax returns, which every business must make, a sole trader is not required to make public any information on the business.
Setting up as a partnership
A partnership, essentially, is an agreement between two or more people to go into business together. It may be no more formal than a handshake or may run to a multi-page legal document. Whichever route you take, build the following points into your planning:
• In a partnership, each partner is liable for all the liabilities of the business. If the business fails, and your partner(s) abandon(s) you, you could be left to pay for everything out of your own pocket. Before entering a partnership, decide whether you trust your partner(s)-to-be with everything you own – because that’s what you will be doing.
• If you write down nothing else, write down and have all the partners sign a document setting out how the business is to be financed, how profits and losses are to be shared, and what will happen if one of the partners decides to leave. These are important points. Failure to agree on them at an early stage can lead to difficulty later.
In some countries, it is possible to form a ‘limited liability partnership’. For full details of the procedures involved, and the implications of a limited liability partnership, check with your lawyer (see below).
Forming an unlimited company
Usually, an unlimited company is formed in much the same way as a limited liability company. The principal difference is that the company’s Memorandum of Association (part of the company’s constitution) states that the liability of members
is unlimited. Again, like sole traders and partnerships, this exposes your total assets in the event of the failure of the company. There seems little advantage in going through the formation requirements of a company without benefiting from limited liability.
Forming a limited liability company
A limited liability company is a legal entity separate from its share-holders. The shareholders are only liable, in the event of the business becoming unable to pay its debts, for any amount outstanding on their subscribed shareholdings.
The steps involved in forming a limited company are:
• Decide on a name for your company.
• Define the purpose for which the company is being formed. This will make up the company’s Objects clause.
• Prepare the Memorandum of Association, which states what the company has been set up to do, who the initial share-holders are and how much they have subscribed.
• Prepare the Articles of Association, which details the rules governing internal procedures of the company.
• Submit the appropriate forms, together with the Memorandum and Articles of Association and a cheque or draft for the formation fees, to the Companies
The cost of forming a limited company depends on whether you do the work yourself or ask an accountant, solicitor, or company formation agent to do it for you. Typically, using a professional adds considerably to the cost.
If your application to form a company is accepted, the Registrar will issue a Certificate of Incorporation. Only after its issue, and the first meeting of the Board of Directors of the company, may the company begin to trade.
Forming a co-operative
A worker co-operative is where a team comes together to form and run a business according to a set of values that includes self-help, self-responsibility, democracy, equality and solidarity. The business is jointly owned and democratically controlled. Co-operative members believe in the ethical values of honesty, openness, social responsibility and caring for others. The Co-operative Principles provide guidelines on how the business should conduct itself.
Although taxation legislation varies from country to country, in general businesses are subject to the following types of taxes, however they may be described:
• Income tax: Sole traders and partnerships on their profits.
• Corporation tax: Limited liability companies on their profits.
• Value added tax (VAT)/Sales tax: All businesses on sales.
• Social insurance: All businesses with employees (including owner/directors).
• Capital gains tax: All businesses on capital gains made on the purchase and resale of non-trading assets.
Check with your local tax authorities to identify the taxes that apply to your business.
It is usually your obligation to notify the taxation authorities, through your local tax office, of the establishment of your business and to provide them with the information they require to register your business for the relevant taxes.
Record-keeping and returns
Taxation authorities usually have certain requirements regarding record-keeping and accounts that you must comply with. Your accountant or local tax office will provide you with all the information you need.
For most taxes, you are required to supply the taxation authorities with specific information on, or by, specific dates. These are called ‘returns’ and there are usually penalties for late submission or not submitting returns at all. Again, your accountant or local tax office will provide you with all the information you need.