We see businesses everywhere around us – when you buy new clothes, order food or pay someone to run an errand for you!
Whether you’re a consumer or someone wanting to start a business, it’s always good to understand the fundamentals of the business world and how it all works. So, what is a business?
In this article, we’ll break down what a business actually is, including structure, key roles in a business, buying, selling, relevant legislation, regulatory bodies, contracts and the move towards eCommerce.
What Is A Business?
A business is an organisation that accumulates a profit by selling goods or providing a service. The key elements that make an organisation are:
- Product: This is the item or service the business provides.
- Market: A business must know their audience, or the people they want to sell to
- Vision: A business performs well when driven by a clear purpose and business plan from the outset
- Finances: A business needs to consider and manage their capital, profit and investments well to see results.
Why Do People Start Businesses?
People start businesses for a multitude of reasons. They may have a product or service to offer they believe can compete in the market, which could generate a generous profit. Perhaps they would like to work for themselves as their own boss. Others may enjoy the twists and challenges of starting their own business.
Financial gain and security can also play a factor in persuading people to take the leap and start their own endeavour.
Overall, starting a business can be a rewarding experience, and can lead to meaningful connections in any industry.
What Are Some Types Of Businesses?
Not all entrepreneurs will have the same purpose, resources and requirements, therefore, not all businesses will suit the same structure. There are different structures business owners can choose to adopt. It’s important to keep in mind that once a business chooses a particular structure, they are not glued to it. They can change their business structure when it suits them.
For example, a business may start off as a sole trader but later turn into a company depending on changes they experience during their business journey.
Generally speaking, when choosing a business structure, you should think about the intended
- Sole Trader: A sole trader is an individual who runs their business by themselves. It’s simple and relatively cheap to set up, but it carries higher risk due to unlimited liability (we’ll cover this later in the article).
- Partnership: When two or more people start a business together, they have formed a partnership. A partnership business structure is different, depending on the type of liabilities
- Company: A company is a legal entity on its own. You can either have a private or public company- the specific requirements of the business will depend on which structure you chose.
Each structure has its advantages and disadvantages, and different required documentation. It’s important to assess your financial situation as well as the level of risk you’re prepared to carry prior to finalising this kind of decision.
For example, a company is generally more complex in nature, and will consequently require more key personnel to manage. However, as the company is its own legal person, any legal or financial troubles are the company’s own.
If the company finds itself in debt, you can choose to sell the company’s assets (for example, the company car) but your personal assets (such as your house) will remain unaffected.
Which Business Types Have Unlimited Liability?
Like we mentioned earlier, sole traders and partnerships carry unlimited liability. This means that if the business runs into any trouble (for example, they owe money to another party), then the business owner will be personally liable for that money.
In some cases, the business owner may need to sell their assets to fulfil these responsibilities. So, when choosing your business structure, you want to think about how much risk is involved in the transactions you’re entering into, and whether this risk is worth the returns you’re making.
Companies, on the other hand, have limited liability, offering more protection for you as the business owner. The company is seen as a separate entity, so if it owes money to another party, this is the company’s’ responsibility rather than the business owner’s. So, you can view the company as its own person, capable of owing and being owed money.
Is A Business And Company The Same Thing?
Every company is a business but not all businesses are companies. There are different types of businesses as mentioned above and a company is just one type of business structure.
The key distinguishing feature of a company is its limited liability (which we discussed previously).
How Do I Buy Or Sell A Business?
There’s a lot to consider when buying or selling a business. Many people like to go with business brokers for professional advice. Initially, you would need to have your business valued and decide which aspects of it you are selling (such as the intellectual property, business’ assets). The same goes for purchasing a business.
It’s crucial to determine the value and consider if you’re getting the business outright or certain parts of it.
You’ll also need to consider some of the following:
- Transferring ownership through an IP Assignment Deed
- Transferring a trade mark
- What will happen to existing staff
- Handover training
- Special tax requirements
- Transferring your lease
- Documents for transferring the registered business name
Before you finalise the sale, it’s important that you go through a checklist for selling a business. Our expert lawyers can guide you through this process and ensure you don’t miss any key steps.
If you’re looking to buy a business, you may also consider purchasing a franchise. Franchising happens when an already established business decides to expand, usually in a different location.
Purchasing a franchise would mean you gain access to the intellectual property and business plans and anything else relevant to operating the business. In exchange, a franchise fee is paid to the franchisor. A common example is purchasing a Donut King franchise and opening one in your local shopping centre.
Franchising laws can be quite complex, and you need to make sure you’re on top of your obligations, as well as the terms set out in your Franchise Agreement.
If you’re thinking of buying a franchise, here are some key things you need to know.
We have a number of resources to guide you in various stages of the franchising process, such as:
- Selling A Franchise
- What To Do At The End Of A Franchise
- Legal Documents You Need For Franchising
- Franchise Agreements
- Terminating A Franchise Agreement
- What To Do With A Bad Franchisee
- Franchisees’ Legal Obligations
- What Are Franchising Royalties?
What Are Some Of The Key Roles In A Company?
Directors are people who oversee the company. They are high up in the chain of command and hold considerable authority. They also have a number of director duties, and if they breach any of these, there are serious consequences.
Employees are people that are contracted to do a job within the company. An employee of the company can be a manager, receptionist, assistant, IT technician and others. It’s important to not confuse this with contractors, as your obligations to contractors are a little bit different.
Shareholders are people that own a percentage of the company. A shareholder can be anyone and they have particular rights and duties towards the company, however their role is more external rather than internal.
Stakeholders are anyone that has any interest in the operations of the company. A stakeholder can be anyone from a high level employee, a customer of the company or a vendor the company works with.
Are Charities, Not For Profits and Social Enterprises Considered Businesses?
Charities and Not-for-profits are not considered a business. As they do not exist to earn economic profit and rely on donations and grants to keep their organisation running, they do not qualify as a business.
A social enterprise, on the other hand, is a business with a philanthropic cause. Social enterprises earn profits through selling a good or service. However, they operate with a particular social, economic, environmental or political cause in mind.
For example, a clothing store that only employs people from disadvantaged backgrounds or a vegan cafe that gives a portion of its profits to animal welfare causes.
What Laws Regulate Businesses?
Companies Act 2006
Any businesses that registers itself as a corporation will be regulated by the Companies Act 2006. The Act essentially covers everything from registering the business, taxes, the duties of directors, shareholders, taxes and other administrative tasks.
If you’re a business operating in the UK, it’s important to know and understand your obligations under the Companies Act to avoid penalties.
Consumer Rights Act 2015
In other words, the Act ensures that consumers are treated fairly when dealing with businesses, and gives them options to take legal action if these rights are breached.
What Contracts Would I Need As A Business?
Contracts are essential for any business to safely conduct business activities. It ensures your risks are mitigated and key personnel are clear on what they need to do.
The kind of contracts you need will depend on the kind of business you operate. Generally speaking, some of the kinds of contracts you can expect to come across are:
- Employment Contracts
- Shareholder Agreements
- Service Agreements
- Supply Agreement
- Non-Disclosure Agreements
Can I Do Business Overseas?
It’s quite common for businesses to expand their market overseas. If you feel as though what you have to offer will have value in other regions, then overseas expansion greatly benefits your businesses in both profit and visibility.
Firstly, it’s better to expand to a few places at a time before going completely global. Each region will have their own regulations regarding internet privacy, tariffs, customs and national regulations.
It’s also worth looking into how you can draft internationally enforceable contracts so that your overseas business activities have minimal legal hiccups.
How Do I Start An Online Business?
Starting a business online, also known as e-commerce, has become increasingly popular due to its convenience, largely simplicity of use and accessibility.
What Is E-Commerce?
E-commerce refers to businesses that operate online. Their goods and services can be purchased online. There are additional considerations for businesses that have decided to operate online.
Firstly, the general principles and expectations of a business that operates online is still expected. Having a business online does not exempt one from the usual processes and obligations, therefore it’s still important to register a business name, pay relevant taxes and fees.
Secondly, people are wary of buying online, particularly from places that are new. Online credit scams are a genuine concern among consumers. As a business owner, it’s important to use verified payment methods that are familiar to your customers (this is especially important if you’re selling to different countries) so they can feel comfortable when checking out.
Where Do I Get Funding?
Generally, you will need to attract investors to earn enough capital for your business. Getting investors interested in your venture involves having promising business plans, ensuring steps are taken to guarantee financial safety – even corporate and social responsibility plays a role in getting people to attach their resources to your idea.
There are many options available when it comes to capital raising, so it’s worth reading through your choices moving forward.
A business involves many things, but the key takeaways are the following:
- There are multiple types of business structures – the one that is right for your business will be determined by your individual circumstances.
- Business can be charitable, however this involves a different process and structure.
- Seek the help of a legal professional for your contracts – this is what ties a business together so it’s important to get it right.
- It’s important to be aware of relevant legislation and the regulatory bodies you may need to report to
- Online businesses and e-Commerce are subject to some of their own rules and regulations as well as the ones of a traditional business
We can answer any questions you may have regarding business set up or funding options. Our expert lawyers can review your contracts or advise you on the regulations you need to comply with depending on the nature of your business activities.
If you would like to talk to a legal consultant, you can reach us at 1800 730 617 or [email protected] for a free, no-obligations chat.
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