Monday 27 April 2009

What Tasks Need to be Completed When Starting a Limited Company?

Having helped start two companies, another that I'm involved in is soon to incorporate. Here, I'll list the various steps you need to go through when setting up a new private limited company, in the United Kingdom.

Register with Companies House


Companies House has the details of all companies trading in the UK. This includes details of directors and shareholders, as well as financial information (accounts). Incorporation involves filing the relevant form, together with a small fee, with the Registrar of Companies. The snag is that the form needs to have the signature of a witness that is deemed "official". This boils down to needing a lawyer to watch you put pen to paper. Instead of the hassle and expense of doing this, you can either buy a ready-made company from one of the many firms offering them, or use an electronic incorporation service. In the latter, the service acts as the witness, and files your incorporation forms for you. The fee over and above Companies House's own can be as little as £5, and it's worth shopping around. The list of companies offering electronic incorporation services is on Companies House's web site. Note that all such firms will try to sell you all sorts of other services (e.g. doing your accounts for you, running your web site). You only need them to submit your Form 10 and Form 12 to Companies House, and send you back electronic versions of your company documents.

Companies House has a vast amount of guidance on the intricacies of incorporating, and running, a company. Take the time to read it, particularly the Guidance on Company Formation.

Register for Electronic Filing


Whenever you need to change the address of any director or the company secretary, or file the annual return, Companies House allows you to do this electronically using their WebFiling service. You can also opt for their PROOF scheme, in order that they will only accept documents electronically rather than also by post. This has the advantage that it is much faster, and also more secure, as it prevents random people sending in false changes of address for your company. Registration for WebFiling necessitates asking Companies House to send you an activation code through the post, whilst PROOF also requires you to send them a paper form.

Register as an Employer


Company directors are required to fill in an Employment page in their self-assessment tax returns for each company they are director of. HMRC tell me that this applies even if the director did not actually earn anything, which implies that as soon as a company incorporates, it has employees in the form of its directors. (Note that this conflicts with the idea expressed in the "When You Need to Register" (as an employer) section of HMRC's guidance, which implies that if employees are not paid very much, registration is not necessary).

In order to be an employer, the company must register as such with HMRC, and can use their Send New Employer Details by E-mail tool (provided that the company has fewer than 9 directors, and does not operate a "simplified" PAYE scheme with more than 10 employees. If so, register by telephone).

Within a few days, your accounts office reference and PAYE (Pay As You Earn) reference numbers will come by post. These are needed when filling in PAYE forms, and by your directors for their tax returns.

Register for PAYE Online Services


Having obtained your PAYE reference, you can now register for using HMRC's PAYE online tools. These make life easy as regards keeping track of employee data, and submitting forms (e.g. when you take someone on, or submitting P14s at the end of the tax year).

Registration for online PAYE services requires you to create a Government Gateway ID and password, which is sent to you in the post, along with an activation code. You'll then be able to tell HMRC that you're employing your directors.

Inform HMRC that PAY/NICs Contributions will be Nil


If you will not be paying your directors anything (in cash or any other benefit), you are unlikely to owe HMRC income tax or Class I NICs (National Insurance Contributions). Normally, such payments to HMRC are made monthly, or quarterly for small businesses. However, you can inform HMRC that your returns will be "nil returns" for the foreseeable future, which will remove the requirement on you to keep sending these in. For the telephone number for this, see the No PAYE/NICs Payment Due page. You can also use the form on that page to send in nil returns for any months/quarters where you do not owe any PAYE/NICs, but have not notified HMRC that you will be making nil returns for an extended period of time.

Take Out Employers' Liability Insurance


If you are intending to pay your employees anything at all, you are almost certain to be legally required to take out employers' liability insurance. Take a look at my post Do You Need Employers' Liability Insurance? for more information on this.

Register for Corporation Tax Online


Soon after your first year of trading you'll receive a Corporation Tax return in the post from HMRC. You can also file this online (which makes life easy, as the paper form covers many cases which are unlikely to apply to you), but have to register to do so. You can only do this when you receive your UTR (Universal Tax Reference) number, and hence probably won't be able to do so at the time you register for PAYE online. Oh well... See Corporation Tax online registration (fortunately, you can use the same Government Gateway ID as for PAYE online).

Conclusions


If you've managed all of the above, congratulations! All you now have to do is survive your first annual return from Companies House (where you detail who the shareholders are), and file your accounts with them (which also need to be filed with HMRC).

If all of this fills you with fear, an accountant will be able to help, but of course they'll charge you money. If you're a start-up in Cambridge who needs someone on board to help navigate through the waters of legal and financial bureaucracy, I'm job hunting!

Do leave any questions/comments and I'll try to address them in a future post.

Tuesday 21 April 2009

Do You Need Employers' Liability Insurance?

I'm involved with three companies: N-Sim, a software consultancy, Accuvex, a holding company, and Verieda, which works on EDA tools. When each of them has been started, the same question has gone through my head: "do we need to take out employers' liability insurance?".

Employers' liability insurance, or ELI for short, is normally required by law in order to protect your employees. For example, if an employee on a building site falls from some scaffolding, (hopefully!) the company's ELI will pay out. In the United Kingdom, the minimum cover is £5 million, and most policies offer cover of £10 million.

For many companies, the question of "do I employ anyone?" has an obvious answer. Construction workers are a case in point. However, when it comes to software companies, it might not be such an easy question. "Surely", the argument goes, "I don't need ELI if I don't employ anyone, if all my work is done by contractors?".

Exemptions from ELI


The UK Health & Safety Executive have a guide to ELI for employers, which describes what exemptions there are. In particular the following are exempt:
  • Most public organisations (government departments, police...), and health bodies.
  • Family businesses where all employees are closely related to the owner (but not when the business is a limited company).
  • Companies which only employ their owner, where that owner owns 50% or more of the issued share capital.


I'll assume that we're dealing with a private limited company, probably writing software, and hence that the first two exemptions aren't relevant. The 2004 amendment to the 1969 Employers' Liability (Compulsory Insurance) Act allows only for a company with a single employee (who fulfills the 50% criterion above) to be exempt. Hence, two directors who split the equity equally and are employees are not exempt.

That's fine, but what about companies with unequal shareholdings, or more than two directors, or with contractors? Who counts as an employee?

Who's an Employee?


For income tax purposes, directors of limited companies are treated as employees, and hence fill in the "Employment" pages of their self-assessment tax return. In most cases, this is reasonable, since the directors are likely to be deriving benefit (salary or dividends) from their work, and moreover are essential (difficult to replace) in the company's normal function. They cannot subcontract their responsibilities, nor (generally) do they provide their own tools for doing the job. All of these aspects are some of the tests of whether someone is employed by the company, or a self-employed contractor.

On the face of it, then, companies that employ more than one director need ELI.

However, the HSE's guide to ELI for employers also says that "you may not need [ELI] for people who work for you, where they do not work exclusively for you". Clearly, this is relevant when a contractor performs some work for the company, but also carries out similar work for other entities. It is important to note that the HSE's definition of who is an employee is distinct from HMRC's (Revenue & Customs) definition: someone's tax arrangements may mean they are defined as self-employed, but from an ELI perspective, they may be an employee. I'm going to assume that this provision does not apply to part-time employees of your business, who have another job. It's unclear, though.

Of course, if you're a start-up company, and you don't pay your directors anything, then they don't count as employees for ELI (see HSE's guide to ELI for employers again), but the company can still be held liable in case of a claim for compensation, so taking out ELI might still be wise. Hence, one exemption might be to have a director, who owns a majority shareholding, being an employee, whilst having another person helping you out, who is unpaid. Bad luck for the unpaid person...

So Who Does Need Employers' Liability Insurance?


If you're a one-person band (with a majority shareholding), and only use contractors (who satisfy HSE's tests for not being employees, rather than just having self-assessment status for tax purposes), you're likely to be exempt. In any other case, you're not.

Which brings us to an interesting conclusion: if two friends start-up a limited company that sells shareware software, both of them being directors with 50% holdings, and carrying out part-time work for the company for which they are paid, say, £10 a month (it's a small company!), it seems that they need ELI. This is despite the fact that they are both directors, working from home, earning tiny amounts, and would be stupid to sue themselves. Perhaps this is one reason that such small companies shouldn't bother incorporating.

Having said that, note that if you have a limited company that is not paying its directors (e.g. because it's just starting up, or is dormant), it appears that ELI is not necessary.

(Note though, that if you're a director, when you want to fill in your tax return, you'll need an "employer's PAYE reference". This can only obtain by registering the company as an employer with HMRC. And then not paying yourself anything to avoid needing ELI. Oh well...)

But ELI Costs Too Much!


It's definitely worth shopping around: different insurers quoted us wildly disparate premiums. Policies tend to be based on how large the company's wage bill is, hence the premium doesn't have to be unmanageable. Different companies will have different minima for such total wage bills (one reason for shopping around). At present, N-Sim uses Zurich Insurance, who meet our needs well, though they do include (for free) a public liability insurance that does not cover our main line of business which is selling software consulting services. Nevermind...

Update (21/04/2009): Just found the statistic that around 210,000 SMEs in the UK do not have ELI. Not really a surprise, given the costs and how one could easily think "we're friends, we won't sue each other"...

Sunday 12 April 2009

How Charity Funding Could be More Venture-like

I'm currently standing for election to the General Council (a.k.a. Executive Board) of Crosslinks, a Christian missionary society. One of the reasons for this is that I believe that charities have a lot to learn from the way businesses are run. Something that I've recently been thinking about is how funding for charitable projects could be more like funding for start-ups.

V-Cs vs Charities Today


On the face of it, V-Cs and charities are hugely different. Charities receive donations, and use those funds to work towards some worthwhile purpose, but one that generally does not make large profits. Start-ups receive seed or venture capital funding in order that (hopefully!) the company will grow, make large profits, and hence deliver a good ROI.

However, today, giving to charity is far more project-based than organisational. What I mean by this is that we now prefer to support "tsunami relief in Asia", rather than (as previously) Oxfam or Christian Aid. We feel more involved in the work, and have a clearer idea of where our money is going. Transparency is becoming more important. Goal setting and satisfaction are key to convincing donors that our project is worthy of their money.

It seems to me that charity donors are becoming increasingly similar to company shareholders. Of course, the return on our investment comes not in the form of monetary dividends or increased share valuations, but rather in the successes achieved by the projects we support. The demand for transparency, and the availability of information (everything from easily accessible charity accounts, to Google Earth views of project areas, to YouTube videos issued by project members) means that donors can be far more involved in projects. This can only be a good thing.

Today, many volunteers for charities are asked to raise their own support, i.e. convince their contacts to pledge the requisite amount of donations to pay for the overheads of having that volunteer on the project, and perhaps pay them a stipend. Charities become organisations that have a particular focus (perhaps a geographical area, such as East Africa, or a well-defined purpose, such as clearing landmines), and have contacts and expertise in their focus-area. They can help volunteers (who have their own funding) to best achieve their projects' goals.

Proposal: Seed Fund for Charities


Here's my proposal: create a fund, similar to a venture fund, that is financed by donors. The fund would have a well-defined focus and a well-qualified board, in order to evaluate potential project investments. People with good project ideas come to the fund, with the equivalent of business plans, showing what money is needed to start the project off, what goals the project has, and how measurements will show whether those goals have been satisfied. The fund invests over, say, a period of five years. During this period, it provides advice, (or uses its network of contacts to provide this), and in addition provides the seed funding to employ a professional fund raiser to make the project self-sustaining. After the five years, the project is evaluated, in the same way a start-up is, in order to ascertain whether it can be "sold on" (or perhaps, "spun out" is better, since no profit is gained) to be self-sufficient, whether it needs a little more funding/time to become so, or whether it should be wound up.

This is different from social enterprises in that there is no monetary return on investment. Ultimately, it is still about charitable giving. The key is to better enable projects to hit the ground running, and have a significant impact sooner, rather than the uncertainty of beginning a project with "just enough" money. It also means that the usage of donors' money is overseen by an independent, experienced board, rather than by (potentially) inexperienced volunteers.

Existing charitable organisations still have a significant role in this paradigm. Today, they provide expertise and contacts to volunteers, yet have no control (really) over what self-funded volunteers do. In my model, the charity acts as a service provider, for example, helping with the administration tasks of a project. Remember that after the first five years, the fund will bow out, and it will be "normal" donors who fund the project! Donor relations are hugely important. Expertise in the particular area the project is intended for is also crucial.

How is this fund different from grant-making bodies? In part, it is not: grants may well imply supervision, similar to that the fund would provide. However, my proposal is that the fund is financed by donors, like you and me, rather than government or other large entities. Of course, there is no reason that corporates could not get involved, showing how their charitable giving is being well-invested.

But isn't this fund like one of today's charities, which takes donations, and then uses them however it sees best? Of course, that is the aim. They key here is that the fund provides seed finance. It allows projects to get started, even if they have significant up-front capital expenditure. It then guides them to maturity, before letting them loose, either on their own, or under the umbrella of another charity. Today's charities aren't built around that model, though some, like Cancer Research UK, are becoming more V-C-like.

It's also important that the donors to the fund are kept very up-to-date about how their investment is performing. In my view, many charities fail here. The Internet has provided huge opportunities for cheap communication between donors and project volunteers. Let's use it. If a charity today doesn't have a fan page on Facebook, at least one blog on its activities, volunteer updates on Twitter, YouTube videos showing how projects goals are being met, and a regular e-mail to its supporters, it's falling behind the times. This is where this fund differs from a V-C, in that the only way ROI can be measured is how people perceive their money is being used. There is no single figure that can be labelled as the fund's "return". However, just because the return is not monetary does not provide an excuse for less shareholder involvement: it implies the need for more!

Why is this paradigm important?


  • It allows donors to contribute to promising projects that are just starting out.
  • It separates the tasks of financial investment from the on-the-ground activities of the project (why should volunteers helping with refugee work be expected to be good finance directors?).
  • It provides clear structures and requirements on transparency for projects that are funded.
  • It encourages projects to become self-sufficient, or else have clear timescales by which they are wound down.
  • It frees traditional charities from the dichotomy of funding their back-office functions versus charitable activities, by allowing them to be specialised service organisations that are contracted by projects carrying out charitable activities.


Conclusions


  • Existing charities need to become more service-oriented, being contracted for their expertise by projects (possibly funded by charitable seed funds).
  • Volunteers can come to such funds to gain start-up capital, contacts and advice, and have their project proposals vetted.
  • Communication between project volunteers and donors is of paramount importance in an age where greater transparency is the order of the day.
This idea is very much a work in progress. Please comment and tell me where I'm wrong!

Update (19/04/2009): Serena Fassó pointed me to Social Venture Partners Calgary, who do roughly what I've described! Note that this type of scheme differs from Social Venture Capital, which normally involves capital that is ethically invested, but still has the objective of achieving financial return.