16 times a smaller business should be thinking about using a lawyer, part three: Money

Author: Emma Shipp
Lawyer Business Finances

Funding for business

The working capital necessary to start a business is likely to come from the founders (or their friends/family) and banks. In some cases funding will come as a result of a loan or debt on which you pay interest. But you may also raise money through what’s known as equity capital (where you provide shares in your business in return for an investment of money).

It is important to get the balance between debt and equity capital right. Bank terms can vary significantly and may include unexpected triggers for repayment. Loans from individuals need to be documented to protect both the business and the private lender. 

If the business has been successful and has good prospects, funding may be available from “private equity” investors who provide capital for a stake in the business. Advice on the terms of such funding is essential. The equity investors will likely have substantial legal advice on their side which needs to be matched on yours if you want to end up with a fair deal.

The priority in every case is to be sure that the legal terms deliver what the business is expecting and to reduce the risk of unpleasant surprises from the small print.

Tax

Many routine tax issues are best dealt with by accountants but some areas require a lawyer, either because they require the application of the law to particular facts or because they go beyond the tax issues usually dealt with by accountants.

For example: 

  • A dispute with HMRC as to whether individuals were liable for PAYE as employees or were, as a matter of law, self-employed would generally be best handled by a lawyer.
  • Issues relating to capital taxes such as capital gains tax on the disposal of shares or inheritance tax planning in a family business would also usually be dealt with by a lawyer. Lawyers may also be expected to deal with taxes relating to property transactions including stamp duty and VAT.
  • Non-routine HMRC investigations are also usually best handled with a lawyer’s support.

Cash flow problems

If these do arise, the business may be technically insolvent and the directors may come to be at risk of personal liability if they don’t act correctly. Trading through and out of difficulty may be a legitimate course but this should not be attempted without legal advice from an insolvency specialist. The taking of advice and acting upon it is likely in itself to reduce personal exposure.

Insolvency processes threatened or actioned against people who owe you money may also be an effective way of collecting larger debts where a business is being harmed by the cash flow difficulties of their debtors. Insolvency lawyers will often act very economically in relation to debt recovery if there is a prospect of being involved in the insolvency of another business.


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