CMF LEGAL WORKSHOP

In association with Follett Stock

Lucy Morgan (above) of Follett Stock hosted the session, held on 7th September 2005 at 6pm at the Truro offices of Follett Stock.

In Attendance:

Olly Berry - Oscha
Terry Corby
Denzil Monk - Awen
Abbie Woolhose
Doug Dawson
Saira O’Dwyer
Tim Robins - CSV Org.
Rebecca Matthews
Paul Farmer - War-rag
David Skehan
Joan Beveridge - CMF
Pippa Best - Cornwall Film
Kathy Perkin - Cornwall Film

Representatives from Follett Stock:

David Follett
Sonya Pennington
Lucy Morgan.
Ben Lundy

Pippa Best opened the workshop to members introducing the newly appointed Cornwall Media Focus Co-ordinator, Joan Beveridge.

Joan explained that the purpose of the workshop was to help give members a greater understanding legal aspects surrounding company and copyright law. With eveyone’s approval, Joan took photos of the workshop throughout the evening,

Joan then handed over to Follett Stock, whose first speaker of the night was Sonya Pennington. The following notes on Sonya’s presentation were accompanied by several handouts – spare copies of which are still available through the Cornwall Film Office.

CHOOSING A SUITABLE BUSINESS STRUCTURE

When setting up a business, it is important to carefully consider which business structure will be most suitable for you. There are four main structures to choose from:

operating as a sole trader;
a partnership;
a limited liability partnership; and
a limited company.

Although there are other structures available, they are merely variations of the four listed above.

Clearly, if you are setting up a business on your own you will be limited to operating as either a sole trader or through a limited company.

Practical Steps

No matter what business structure is most suitable for you there are a number of practical issues to be taken in to account:

Employment Law

There is a great deal of employment legislation to consider and every employer must ensure that throughout employment from recruitment to dismissal employees must be treated fairly. Employees must also have a written document of terms of employment, health and safety laws must be complied with and Income Tax and National Insurance must also be paid on behalf of each employee. There is a great deal of employment legislation to take in to consideration and is an important issue for any employer and an important issue to bear in mind for any person employed in the business at any time.

Tax and National Insurance

Tax of course is an important consideration when choosing a business structure, for example, tax on earnings is paid in the form of Income Tax in the case of sole traders and partners and in the form of corporation tax in the case of companies. All businesses pay tax on their earnings in some form. It is important that you seek the advice of an accountant on tax issues to ascertain the most tax efficient structure for you.

VAT Registration

This is a direct tax charged for the provision of goods and services. With effect from 1 April 2005, registration with H M Revenue and Customs is necessary when turnover exceeds £60,000 per annum. Again, this is something that an accountant can guide you through.

Insurance

There is a whole range of insurance policies which you should bear in mind when considering setting up a business. Depending on the type of business being undertaken there may be various issues which it would be inadvisable to cover by way of insurance for example, motor insurance, public liability insurance, product liability insurance, employer’s liability insurance, to name just a few.

Licences

Again depending on the type of business, this would determine the necessity for particular licences for example, premises licence, health and safety licences, export licences, and consumer credit licences.

Banking Arrangements

The requirements of the business in terms of funding the business both short term and in the future may dictate the type of business structure chosen.

Intellectual Property Issues

The protection of any intellectual property rights is an important issue as these may already be or may become valuable assets in the future.

Premises

The location and ownership of business premises is an important issue. You may initially be working from your house or be considering a licence/tenancy or lease of the property. It may be that you are considering the purchase of freehold premises or transferring the ownership of premises to a legal entity.

Sole Trader

This is the most basic business structure available. A sole trader is self-employed and runs his own business. He pays income tax on his income and he may or may not also have employees.

Although there is a great deal of freedom associated with operating as a sole trader, especially due to the lack of strict regulation and registration requirements, the sole trader is personally liable for all of the business’ debts and obligations without limit. This means that any creditor of the business can claim for the repayment of debts from the sole trader’s own personal property.

Partnership

The legal definition of a partnership is ‘a relationship which subsists between persons carrying on a business in common with a view of profit’ (s.1 Partnership Act 1890). In general partnerships consist of two or more persons who share the decision making in respect of the business and share the ownership of the assets and divide the profits.

Each partner is individually responsible for all of the partnership’s liabilities, debts and contracts of the business even if they were created or entered into by another partner. This means that a creditor can choose to sue just one partner for all of the debt owed to him by the partnership if it so wishes. As each partner is jointly and severally liable for the debts and liabilities of the business without limit then if one partner does not meet the liabilities any of the partners may be held wholly responsible for all of those liabilities.

The rights and responsibilities of all partners are usually regulated by a ‘Deed of Partnership’ or ‘Partnership Agreement’, although the Partnership Act 1890 does set out the default position if no such written agreement exists.

One of the benefits of a partnership is the fact that there are no formal filing requirements and no registration procedures. This makes them flexible and also means that the partnership agreement remains private as between the partners, although it is worth bearing in mind that if there is a change of partner the partnership itself is automatically dissolved.

A disadvantage of a partnership is that it is harder for the partner to raise capital as a partnership cannot issue debentures or floating charges and therefore the partners must contribute personally to any capital demands on the partnership.

Limited Liability Partnership

Limited liability partnerships (“LLPs”) are not partnerships but are an alternative corporate business vehicle that combines the flexible structure of a partnership with the benefit for its members of limited liability.

LLPs have a similar organisational structure to a normal partnership, and they are taxed as a partnership (ie the individual partners pay income tax upon their share of the profits). The default position of LLPs can be found in the Limited Liability Partnerships Act 2000 and secondary legislation.

An LLP is incorporated as a separate legal entity at Companies House. This means that the LLP itself can own property and enter into contracts in its own name and can sue and be sued just like a company.

The main benefit of LLPs is that they offer a limitation on the liability of the partners, each partner is only liable for the amount which he has actually contributed to the business. This means that all partners’ personal property is protected from creditors (unless of course such partner has entered in to a personal guarantee). However, if the LLP were to become insolvent, then the partners may be liable to return any profits or property that were taken from the LLP in the preceding two years where a partner knew or should have known that the LLP could not avoid an insolvent liquidation.

Members of an LLP have the ability to take a full role in the management of the business. Because the LLP is a separate legal entity any changes in the membership of the LLP does not affect its continued existence. The main disadvantage of an LLP is that it has filing requirements and disclosure requirements similar to those of a limited company for example, an LLP must also file an annual return and accounts and maintain registers of members and other company registers at Companies House. This of course means that, like a company, accounts filed at Companies House also become a public document.

Again, it is advisable to enter in to a written agreement to regulate the rights and obligations of the partners within the limited liability partnership. There is, however, no requirement to file this document at Companies House.

Private Company

A private company is a separate legal entity. This means that the company can own property and enter into contracts in its own name and can sue and be sued just like an LLP.

Companies are strictly regulated and must be registered at Companies House. A company needs to have at least one director and a company secretary. However, it is not the directors who ‘own’ the company. The directors deal with the day to day management of the company while the members (shareholders) are the ‘owners’ who hold the financial stake in the company.

In addition to the initial registration requirement, a company must comply with numerous other filing requirements,(with the notable exception of an unlimited company). This includes filing a set of annual accounts and an annual return so that Companies House can maintain up-to-date records. All documents filed at Companies House become public documents so that anyone can have access to them should they so wish.

The internal management of companies is strictly regulated by company law with various procedures that must be followed. Failure to follow such procedures can lead to penalties.

As with an LLP the liability of members is limited to the amount that they have contributed to the share capital of the company. Creditors cannot look beyond that amount except in certain exceptional circumstances. This means that where the only member of the company has contributed just £1, and the company’s debts are around £100,000, that member will only be liable for that £1.
It is advisable for members of the company to enter in to an agreement which regulates the rights and duties of the shareholders. This agreement is known as a shareholders agreement and is drafted to take in to account different circumstances for each individual company.

The directors are agents of the company and manage the affairs of the company and are generally protected from any liabilities of the company because it is the members who are responsible. However, it is possible for directors to become personally liable in a number of situations including where there is an element of fraud, where the director acts outside of his authority, the director fails to maintain and file proper company records, or where the directors have given personal guarantees in relation to loans to the company.

The directors also have fiduciary duties in respect of the company which are founded on principles of trust and confidence. The directors must act in the best interests of the company.

There are three main types of private company:

limited by shares;
limited by guarantee; and
unlimited.

Each company type has individual characteristics:

1 Company limited by shares

This is the most common form of company. Members are issued shares in exchange for their capital contributions to the company and are issued a share certificate in return. It is then possible for these shares to be bought and sold.

2 Company limited by guarantee

Members agree to limit their liability to a set amount in the form of a membership fee. No share certificates are issued. The limitation of the liability of the members will be expres
sly agreed between the members. This type of company is unsuitable for most businesses as it does not have a working capital and so it is almost exclusively used for non commercial entities and charities.

3 Unlimited company

Although the company is a separate legal entity, its members do not enjoy any limitation of liability and are exposed to a substantial amount of risk if the company is wound up. However, the company is exempt from having to file accounts, thereby maintaining a degree of privacy. Such a company is most suitable as a vehicle for holding property where the members do not consider limited liability to be important.

Although this note considers only private companies, it is possible to also have public limited companies. These companies can offer their shares to the public (which is not possible for private limited companies), which can encourage wider investment. However, there are a number of specific requirements that apply to public companies including a minimum limit upon the amount of share capital required and the company secretary must be formally qualified to hold the position. This is why a private company is the preferred option, although a private company can later convert into a public company should it so wish.

Summary

It is important to consider the particular circumstances of each business when choosing a suitable business structure to govern the business going forward. It is advisable to speak to an accountant when considering the most tax efficient structure for you.

Sonya then handed over for a presentation by Lucy Morgan, whose presentation was also accompanied by a handout leaflet, copies of this are still available from the Cornwall Film Office.

Lucy’s presentation covered the following main topics:-

Introduction to Intellectual Property
Copyright and related rights
From idea to bums on seats – how can we help:
Pre-production agreements.
Production
Rights clearances
Distribution
Specific queries re. debt.

General advice given by Lucy is summarised as follows:-

Writers should always enter “ © Name / Date / All rights reserved “ on any work.
Follett Stock have pro-formas of Development Agreements, and can also draw up agreements with crews etc…
Follett Stock can also help with production agreements as well as financiers and producers.

On debt recovery, Lucy outlined the following:

Small Claims Court – Under 5k
There are no costs, therefore can’t pay solicitors out of it.
Routes – CAB, County Court, Money Claim On-line.

Fast Track – Between £5k-£15k
There are some costs for solicitors.
GET LEGAL ADVICE

Multi Track - £15k plus
Cases go to high court – heard by specialist Judge.
Eg Defamation.

Comments on Liquidation of Companies

If Directors have liquidated the company, you won’t get money back, however, if the Directors set up a new, identical company, you may recover money through the Phoenix Clause.

SPV’s – Special Purpose Vehicles:-

If Directors set up a new, but differently named SPV, probably could pursue them, ie. If they set up a new film company.

This brought Lucy’s presentation to a close, to conclude the evening Lucy invited general questions from those in attendance.

One of the discussion was with regards to filming where children were concerned. Lucy confirmed that parents could put a stop to their children being filmed, even if the child had signed a consent form. It was felt that schools generally left any such decisions up to the parents/guardians.

The workshop the finished with all members feeling the workshop had been a useful and rewarding evening.

Follett Stock

Truro Business Park, Threemilestone, Truro, TR4 9NH
Tel: 01872 241700

We are a young progressive firm of solicitors specialising in advising business people. We combine local knowledge with London expertise and experience. We are different from other firms in the South West in that we do not attempt to be ‘all things to all people’. Instead we concentrate on providing a bespoke and specialist commercial service to business clients.

Ben Lundie, whose family lives in Cornwall, returns to the County after ten years working at national law firms in Birmingham. His expertise in the energy sector is recognised in the 2005 Chambers guide to the legal profession that names him as an ‘up and coming lawyer’. He joins us as an Associate solicitor.

Sonya Pennington was brought up in the South West before training, qualifying and working as a corporate lawyer in the Bristol office of a major national and international firm. Sonya returned to Cornwall in 2005 and is a solicitor in the commercial team specialising in company law and has particular knowledg ofI.P and I.T. law.

Katie Ashworth was brought up in the West Country and returned to the area after qualifying at and working in the corporate transactions team of a major City firm for several years. She is a senior solicitor specialising in corporate finance and company law matters. Katie is an Associate Partner at FollettStock

Hugh Murrell was brought up in Cornwall and qualified and practised in a leading City firm in London before returning to the county. He is the partner who heads up the Commercial department and specialises in business law and corporate transactions. He has particular knowledge of shareholder and partnership agreements.

If you have any queries in respect of setting up a business please do not hesitate to contact any member of the commercial team at Follett Stock on 01872 241700 or email sonya.pennington@follettstock.co.uk.