Funding your business often involves seeking the help of investors. However, with 29% of UK startups failing in their first year, it’s understandable for investors to be extra careful about where they inject their cash and whether they purchase shares in a new company due to the high level of risk and uncertainty.
So, to help new startups and companies raise funds in the early stages, the government introduced certain schemes to offer tax reliefs to investors when they buy shares in a company. This acts as an incentive for investors to purchase shares in companies who need the funding.
The government introduced two schemes:
In this article, we’ll dissect the key differences between the two and which one is better for your business.
What Is EIS?
Enterprise Investment Schemes (EIS) offer tax reliefs to investors who want to purchase shares in a company. As we mentioned above, this is a popular option as it incentivises investors to help businesses grow.
Under EIS, businesses can raise up to £5 million every year, and up to £12 million for the duration of the company’s life.
However, for EIS to apply to your investors, you need to follow certain rules. If you do not comply with these rules, the tax reliefs under EIS will be withdrawn.
Who Is Eligible For EIS?
To be eligible for EIS, your company needs to conduct business with the intention of making a profit.
Furthermore, your company needs to satisfy the following requirements. You need to:
- Have a permanent establishment in the UK
- Not be trading on a recognised stock exchange
- Not control another company (other than a qualifying subsidiary)
- Not be controlled by another company
- Not close, or expect to close, after the completion of a project
You must also not have gross assets worth more than £15 million before the issue of shares. You also cannot have less than 250 full-time employees at the time that shares are issued.
EIS also places a cap on the amount that can be raised in a 12 month period. The general rule here is that you cannot raise more than £12 million in your company’s lifetime.
You can read more about the eligibility criteria here.
What Is SEIS?
We’ve discussed EIS, but what is the Seed Enterprise Investment Scheme (SEIS)?
SEIS is similar to EIS in that it offers tax reliefs to investors who are purchasing shares in a company. However, under SEIS, companies can receive up to £150,000. Similar to EIS, the tax reliefs will be withdrawn if the relevant rules are not complied with.
The eligibility criteria is similar to the EIS criteria, however, there are key differences which make one option more attractive than the other depending on what type of company you are and how long you’ve been trading for.
Let’s go through these details below.
What Is The Difference Between EIS And SEIS?
The main difference between EIS and SEIS is its suitability for the type of startup applying for it. More specifically, EIS is more appropriate for larger companies and SEIS is more for those companies that are still in their early stages.
This mostly has to do with the eligibility criteria. For example, SEIS targets businesses who have been trading for less than 2 years, and employs less than 25 people. As such, the amount that investors can invest under this scheme goes up to £100,000 per tax year.
EIS, on the other hand, targets companies with up to seven years of trading history and 250 employees. Unlike EIS, the limit for investment is higher at £1 million per tax year.
In addition, EIS has a certain criteria for Knowledge Intensive Companies (KIC). This refers to companies with higher costs for research and development. These companies can receive up to £10 million per tax year.
EIS Or SEIS: Which One Is Better For My Business?
If you’re a company looking to fund your growth through investors, you may be wondering whether EIS or SEIS is better for you.
The simplest way to go about this question is to consider how long you’ve been running and how big your company is. If you’re on the smaller side, with less than 25 employees and less than 2 years of trading, then SEIS is more suitable for you.
If you’re a more established company, or a KIC, then EIS is more appropriate.
If you’re still unsure, it’s wise to chat to an expert lawyer who can consult with you and discuss which options are best based on your business’ specific needs.
How Else Can I Get Funding For My Startup?
Investors aren’t the only way you can get funding for your business.
It’s common for businesses to take out a business loan. This way, you can receive the funds instantly to help your business hit the ground running and worry about repayment later.
However, the downside is that you need to consider interest rates and assess your business’ current financial situation to determine whether it is a safe and secure method of raising funds. While it is important to have the cash to conduct business activities, you also want to make sure you don’t jeopardise your business’ future in doing so.
Another option would be to borrow money from friends and family. However, it’s still important to capture the details of this arrangement in writing to avoid any issues. This may be a difficult situation where friends or family are involved, so you may wish to consult a lawyer in drafting the relevant documents.
When it comes to funding your business, you have quite a few options. However, opting for either SEIS or EIS is an attractive option for investors in particular as they benefit from tax reliefs, which makes it easier for you to receive funding as well.
However, it’s important to understand the difference between the two and which one is best for you. If you need more help understanding which one is better for you, or you need startup legal advice generally, our experienced startup lawyers are always happy to chat.
If you would like a consultation on your options going forward, you can reach us at 08081347754 or [email protected] for a free, no-obligations chat.
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