Legal Frameworks for Starting Own Business

Introduction

LEGAL FRAMEWORK
Include the legal aspects involved in setting up
STRENGTH WEAKNESS
Sole trader
Business is controlled by one person. Can employ workers.
Easy to organize and comply with legal requirements;
Does not require large initial investment;
Easy to operate and organize since few employees are involved.
The business owner has unlimited liability and will be required to compensate the debts generated by the business from his personal funds;
Small staff restricts operations;
Funding limited to personal capital;
Requires a wide array of knowledge from the owner (e.g. accounting, marketing, logistics) (Hoskin, 2014).
Partnership
Business run by two partners on the basis of a deed of partnership which details the amount of investment, responsibilities, and sharing of revenues.
Easier to organize financially (two investors instead of one);
Allows for allocation of responsibility and tasks on an official basis.
Unlimited liability – both partners pay the firm’s debts from their personal funds;
Deed of partnership cannot cover all details of responsibility and profit-sharing, which can lead to disputes (Hoskin, 2014).
Public limited company
A separate business entity run by at least two people, one of whom is a director.
Limited liability – individuals are protected by a corporate veil and are not personally responsible for the company’s debts;
Can act from its name and exist independently from its members;
Better taxation options than a sole trader.
Complex rules and strict regulations on accounting and operations;
Has restrictions on salaries (PAYE and NICs)
Shareholders can limit the director’s control over business (Hoskin, 2014).
Private limited company
Business entity similar to PLC but without the opportunity to trade its shares on the stock exchange
Better control of share ownership;
Better opportunities for profitability.
Less attractive to external investors (Hoskin, 2014).
Franchise
Business run under a recognized brand, the rights for which need to be bought.
The recognizable brand provides an advantage over unknown businesses;
Supplied with business models and proven guidelines for easier operation;
Provides better funding opportunities from investors;
Can benefit from established local infrastructure.
Regulations are often restrictive and difficult to comply with;
Reputation depends on other franchisees present in the area;
Franchisor requires a share of profits;
Limited control of the business (Lobel, 2016).

Given the scale of the business and the limited previous experience of the partners, the most suitable legal framework for a shop is a private limited company. Choosing this framework would offer possible financial underperformance that is likely to occur at the initial stage of development. It can also offer better taxation options than partnership and sole trader. Next, it will grant opportunities for employment on a local scale, which was stated as one of the goals of the endeavor. Most importantly, this framework offers better flexibility for seeking funding opportunities and investment options. Since the business does not have either a feasible resource base or an established brand name, its emphasis will likely be on innovation and differentiation from existing alternatives. Considering this, the framework should be as unrestrictive as possible in terms of strategic decisions (making franchise unsuitable) while at the same time offer a decent level of legal protection for inexperienced owners.

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Asset-Based Financing

If a business has an asset (e.g. property), it can seek funding based on this fact. The asset can be monetized, and the business will receive the funds based on the asset, and the company who serves as an intermediary will then invite investors to participate in the created agreement by paying the loan. Such a source of funds is cheaper than the bank loan for both sides and does not require a delay before the lenders arrive (Wolters Kluwer, 2014). However, it requires the presence of assets (e.g. the building at the disposal of one of the partners).

Crowdfunding

Such an approach is a recent phenomenon based on the potential of web information technologies. It allows a business owner to seek investors at the cost of borrowing significantly lower than that offered by bank loans. However, its most important advantage is the possibility to reach out to any number of investors at once and add transparency to the funding process. While it may be hard to find the required amount of funds for a young business with no established reputation (very few investors would willingly take the risk), it is possible to secure several dozens of smaller sums (implying lower risk), which makes crowdfunding an appropriate funding option. Unfortunately, due to its relatively young age, the concept is not backed with sufficient legal support from the government, which may repel lenders (Wolters Kluwer, 2014).

Equity Crowdfunding

A variation of crowdfunding where the investors obtain their share of equity in the business (Wolters Kluwer, 2014). It offers most of the advantages of the option discussed above, such as accessibility, flexibility, and ease of reaching a lender. However, obtaining a share of equity means that the lender will be more attentive to growth opportunities displayed by the business, which decreases the possibility of successful funding for a small community-based shop. In addition, such an option is complicated by legal issues, such as the restriction of investing more than 10% in equity crowdfunding over a 12-month period (Wolters Kluwer, 2014).

Reward-Based Investment

A variation of crowdfunding takes advantage of intangible rewards such as gifts and souvenirs. It can take the form of giving some item or service (preferably unique or limited in supply) in return for the investment. This approach can diversify the investment and downscale them to the amounts which can be handled by the members of the local community. One weakness that must be acknowledged is the necessary prerequisite of an established reputation. The customer base must be loyal enough to be willing to invest in the business without any returns (Wolters Kluwer, 2014). Therefore, its success in the initial stage is unlikely.

Angel Investors

An opportunity to secure an investment in return for an equity stake. It is usually decided on a more personal level than equity crowdfunding, which raises the chances to succeed for a small business. Furthermore, angel investors usually pay attention to outstanding ideas rather than a robust business strategy and permit some leeway for young entrepreneurs confronted by difficulties (UK Business Angels Association, 2015). Therefore, this is another appropriate option for our business.

Reference List

Hoskin, J., 2014. Company formation: Should I go sole trader, partnership or limited company? [online]. London: SmallBusiness. Web.

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Lobel, B., 2016. What is a franchise? Advice for small businesses [online]. London: SmallBusiness. Web.

UK Business Angels Association, 2015. Introduction to angel investment [online]. London: UKBAA. Web.

Wolters Kluwer, 2014. Alternative financing: Show me the money [online]. London: CCH. Web.

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