Being realistic is the most common and travelled road to mediocrity. Why you want to be realistic? — WILL SMITH
I am not going to write a long legal paper about company formation, as this is not the goal of the book. I am simply going to stress a couple of practical tips that traditional lawyers often ignore. They may be useful even if you have a company already.
The usual warning is also valid. If you want to start a serious business, it may be worth seeking the help of a lawyer, or at least an accountant (you are going to pay one of them anyway for your bookkeeping when the Kickstarter campaign ends).
This short chapter doesn’t want to dismiss the benefit of lawyers, but it could help you to understand whether the professional in front of you is the right one for your project. Some attorneys are really good with traditional companies, but they may not understand that a startup is different from a traditional company, and it has different requirements.
What Kind of UK Company You Have to Choose
There are different kinds of companies in the UK: limited companies, joint stock companies, limited partnerships and sole traders, to mention the most common ones.
Sometimes I’m asked what the best type of company to choose for Kickstarter is. My answer is always the same: a limited company.
Partnerships are a disaster when raising funds from investors. Sole traders are too risky and again not suitable to raise funds. Joint stock companies are more expensive and you don’t need them at this stage.
This is valid for almost every entrepreneur, but exceptions exist. Therefore, it may be worth having a chat with a lawyer, especially if you start your business with an important budget.
How to Set Up a UK Limited Company
Starting a limited company is very simple in the UK, and you probably already know how to do it. You can register a company online with the government body Companies House (https://www.gov.uk/register-a-company-online) or with a private provider (I have made a list at http://startupagora.com/uk-company-formation).
#TIP — The main advantage of a (major) private provider is that you can access your company online immediately after the formation. You can add new directors, new shareholders, change your office address and so on from day one.
Ironically, if you open your company directly with the government body—Company House—you won’t have immediate access to it. They will send your online password by post to your physical address. Until you receive this letter, you can’t make any changes to your company. As a consequence, if you set up your company through Companies House, it’s important that you set up your office (or virtual office) in advance, or your password will get lost.
I’m not going into detail about the formation, because the process is quite straightforward. If you have never opened a company in the UK, don’t worry, you can still do it. The Companies House website, or the private provider, will ask you basic information such as the name of the company, the name and address of the directors, and so on. Fill in the fields, pay with PayPal or with your credit card, and start trading. That’s it.
If you want to avoid even this minor fee, you probably can. Many UK accountants help their new customers to start a company for free. You just have to find one on the Internet or through word of mouth (if you want to be introduced to mine, feel free to contact me).
Personally, I prefer to NOT put all my eggs in one basket. I ask the accountant to focus on their accountancy services, and they don’t have the password to change the shareholders in my companies. But I may be a bit paranoid, and many entrepreneurs I know have taken the opposite decision. They leave all the hassle in the hands of their accountants, and they are happy with that.
How to Reply to the Only Tricky Question
The only question that could take you by surprise during the formation process is about the “Articles of Association”. This is the charter of the company, and it provides the rules of many important activities, such as how to appoint directors, how to manage the shareholders vote, and other aspects about the life of your company.
When you set up your company, they will ask you if you want to use a standard Articles of Association or a personalized one.
The answer is simple: pick the standard document.
Even if you want custom-made rules, pick the standard document as well.
The reason is tricky. If you pick a standard Articles of Association, the Companies House’s software will incorporate your company in a few hours. One the contrary, if you have a custom-made document, a human employee will be required to check what you have done, and this could easily take ten days. It could take even more time too, if they have doubts about one of your articles and they start asking questions by letter.
Even when we start sophisticated tech startups with angel investors and custom-made rules, we set up the company with a standard Articles of Association. As soon as the company is ready, we apply for a custom-made Articles of Association. This way, we can do business while the bureaucracy checks the personalized rules.
The only exception I can think of is that if you start a company with an important investment and you are required to set up special rules from the beginning, but this is very rare in a company doing crowdfunding.
One Last Point: Lawyers
If you need custom-made rules, this is the right moment to invest some of your money in a good lawyer. If the attorney is smart, he will not overcharge you in order to start a long-term relationship.
The cost could still be painful for a small business, but a cut and paste from the Internet will cost you much more in the long term.
Actor Denny DeVito made me laugh to tears in his movie Other People’s Money. “Lawyers are like nuclear warheads,” he says, “they have theirs, so I have mine. Once you use them, they f*** up everything”.
Well, a custom-made Articles of Association is an exception and Danny would agree with using a lawyer too.
#TIP — When you open a UK company, always accept the standard Articles of Association. If you need a custom-made document, start the company with a standard template anyway and change it later.
A Short Note About the Shares
When you set up a company online, you’ll be asked how many ordinary shares of £1 you need. If you use an accountant or a lawyer, they will probably do the same.
I will not go into legal details because—as an entrepreneur—you should focus on the business. You just need to know two things:
- Shares don’t have to be of £1. They could be 1 cent (£0.01) and even smaller, up to 1/6 of a Pound (£0.000001);
- Shares of £1 are usually NOT the best choice for a startup or a company looking for investors later. The smaller the share, the better. Again, I don’t want to confuse you with boring legal details.
Just be aware that if the lawyer or accountant in front of you doesn’t have a clue about why a smaller share is better, he/she is probably not very experienced with angel investment and venture capital.
#TIP — When you set up a tech company, or a company planning to raise funds later, small shares of £0.01 or even smaller could be the best choice. If the accountant or lawyer in front of you has no clue as to the reason why, they may not be as experienced as they say about your type of business.