With technology as it stands today, it has never been so easy to set up a new business venture. It’s possible to have a great idea in the morning and be fully registered, compliant and even have a bank account by lunchtime. However, speed does not always give the best tax result or the optimum business structure.
Having established whether a concept is viable, the key drivers for the majority of tech start-ups are cost control, equity structuring, rewards, and exit planning.
In some circumstances it can prove to be commercially and fiscally advantageous to use a combination of trading or ownership vehicles e.g. a Holding Company to protect intellectual property, or a Limited Liability Partnership for early stage loss utilisation. Other entities are available including offshore vehicles that may be necessary to access other markets or provide a compliance vehicle.
However, in 99% of cases the default trading vehicle for tech businesses is a Limited Company and this is explored in more detail below.
With all incorporations, there are basically two chosen routes – an off the shelf company, or a bespoke new company. With the former you are merely acquiring something that already exists and has a history, albeit subscriber shares being issued. With the latter it is a new creation that records you as first director and shareholder. Bizarrely, something as simple as making the wrong decision between these two options can cost tax!
A number of problems can arise from those very first share issues when the company is formed and from other fundraising rounds as well.
Amongst, and possibly the most commonly complained about, are valuation and tax problems with HM Revenue and Customs, disparity with perceivably too much dividend or capital being paid to the wrong shareholders, and excessive personal tax being paid as a result of missed remuneration extraction opportunities.
From third parties the gripes generally include failure to achieve venture capital reliefs via Enterprise Investment Scheme (EIS) or its more exciting younger sister Seed EIS (SEIS), or missing opportunities to lock in and reward key staff via the very tax advantaged government approved Enterprise Management Incentive scheme (EMI).
The above are all avoidable problems if proactive advice is sought before final decisions are enacted.
Before charging ahead and incorporating a new company, it is worth considering some different areas that may have an impact later:
If you don’t understand what your accountant or adviser is explaining, ask again. As owner of the business you are responsible for making informed decisions, which is difficult to do if you don’t understand what the problem is or what the information means. That said, a good adviser should ensure that the information and explanations are relevant to you and in a format that will give you the detail you need.
In some respects, it is easier to approach building a business like building a wall. Good foundations are necessary, and it generally helps to know how high you want the wall, what colour the bricks will be and what the purpose of the wall is. Trying to change things afterwards can be nigh on impossible and, in some cases, you have to demolish and start again. Good professional help and guidance during the life of the business should ensure that it is fit for purpose and lasts as long as it should.