Archives For startups

blog-image-test

By John Davies, head of technical, ACCA

It has always been the case that the first step for any entrepreneur wanting to set up in business is to work out what structure would be most appropriate for their business.

For many people, the choice of business form will seem fairly straightforward. If you want to protect your privacy and retain complete control of your business, and are prepared to be financially responsible for its debts, you will probably choose to operate as a sole trader or with trusted colleagues in a partnership. If on the other hand you value the protection of limited liability status you will opt to become a limited company. These two fundamental forms have each existed for well over a century and remain hugely popular.

But it is no longer true to say that the choice of form available to new entrepreneurs is quite as black and white as the above would suggest.

Recent years have in fact seen a significant expansion of the diversity of business forms available to new and existing businesses. Here are a few examples of this movement:

  • The limited liability partnership (LLP) was introduced in 2000. The LLP is a hybrid form, half-way between a partnership and a company. It has the hallmarks of the traditional partnership in that its partners are free to arrange the firm’s internal affairs more or less as they see fit, but it resembles a company in that it is a corporate body and is required to prepare and publish annual accounts. The LLP is available to any type of business but is especially attractive to professional firms that wish to take advantage of protection from personal liability for their individual members.
  • The community interest company (CIC) is a company structure which is expressly intended to be appropriate for enterprises with social or community benefit in mind, rather than purely for the financial advantage of its proprietors. To achieve this the format requires profits made by the company to be ‘locked in’ so as to be channelled towards furthering its corporate aims.
  • Public service mutuals are a new vehicle designed to deliver functions hitherto delivered solely by the public sector. The UK Government is actively encouraging the take up of mutuals as a means of cutting central government costs and has raised the prospect of 1 million public sector workers being transferred to mutual by 2015.

A new report by Tomorrow’s Company, contributed to by ACCA, reviews the new landscape of UK business forms and urges entrepreneurs, advisers and governments to consider the opportunities that are afforded by this expansion of choice.

What choice means is that, for the entrepreneur, it need no longer be a straight choice between partnership and company – depending on the motives of the person starting up the business, one can now contemplate becoming a social enterprise or a charitable incorporated organisation as well as a sole trader and a company limited by shares or guarantee.

From the perspective of government, the report argues that more attention needs to be paid to business form when considering its dealings with private sector businesses and the issuing of contracts to them. It poses the question of whether companies with overtly commercial business and funding models are the right sort of entity to be delivering public services, referring, as an example, to the recent case history of care homes being taken over by listed companies which have aggressive funding models.

And for advisers, such as practising accountants, it means that there is a much wider range of information that they can provide to clients wishing either to set up in business from scratch or to review their existing structure or form.

What this all means is that businesspeople today have more options as regards the structure of their firm and more freedom to organise the way they organise their business so as to align it with the expectations of their consumers and stakeholders. The report makes for interesting reading by any one who has ever felt constrained by the choices available to them.

Advertisements

By Manos Schizas, senior economic analyst, ACCA

The future certainly looks bright for alternative finance providers. The last three years have seen the birth of a plethora of new online (and some offline) platforms allowing businesses to bypass traditional banks and venture capitalists and source various forms of peer-to-peer funding instead. A business can now get peer-to-peer loans, equity, donations, and even fx hedging and insurance online, and who can say what will become available next?

It’s certainly encouraging to see the UK at the forefront of this innovative industry. The typical alternative finance provider (if such a thing exists) is born when some bright sparks, boasting a pool of tremendous and diverse tech and financial know-how between them, decide to leave the world of investment banking or the Big Four behind and pour their life savings into a new way of funding businesses.

It’s heart-warming stuff, but for the industry as a whole there are growing pains as well. The dynamism and diversity of these new industries has caught regulators around the world by surprise and the regulatory reaction could be equally clumsy following a high-profile failure. No two platforms are regulated in exactly the same way, and it’s hard to know how one would be regulated just by looking at their business model. Once you try to think beyond the UK border, the situation becomes almost hopeless.

Then there is uncertainty about the future. For now, for example, the FSA may believe that crowdfunding should be a sophisticated investor’s game, but it’s unlikely to step in to stop Joe Public from investing £10 or even £1,000 in a startup. This could change.

Peer-to-peer and crowdfunding platforms are particularly worth watching. These are industries with relatively low barriers to entry and they’ve been benefitting from the best possible climate over the last three years: mistrust of the banks and the financial system, rock-bottom interest rates, interest from venture capitalists and now government support too. If a recovery finally materialises in a couple of years, not all business models will remain viable. Take p2p loans for instance – like microfinance intermediaries before them, some lenders are boasting relatively low default rates, but this partly reflects the fact that they are young, their market is still unsaturated, and credit takes time to turn sour. Some are preparing for the end of the honeymoon period by providing a level of insurance for participating savers. Others are not.

Other developments are afoot that could change the landscape dramatically. Consider invoice auctioning sites, for instance, such as Marketinvoice or Platform Black. They are innovative, effective and a resounding success overall. Fast forward to ten years from now, when the majority of businesses in the UK will e-invoice each other and consumers, and it may be possible to set up an invoice auction on eBay, or any number of other platforms in seconds. Some invoice auctioning platform will thrive in this new world, but others may not be able to handle the competition.

My point is that sooner or later, the UK will see one of many high-profile failures among the alternative finance providers. This is normal and will probably lead to a healthy shakeout; but the way in which regulators and investors react could define the fortunes of these industries for years to come.

The incumbents know this and are already organising themselves into associations. Their main concern is regulation of the sector – partly out of a genuine concern for their industry’s continued viability and partly, the cynic within me thinks, in order to keep newcomers out. Others will also be watching; if I were in charge of a high-street bank, I’d be waiting for the shakeout so I could buy the surviving platforms from their founders and VC investors for pennies.

In the end, everything will hinge on how these platforms add value. Information, collateral, control and risk – these are the raw materials of access to finance; are the new funding providers sourcing, using or combining them in an innovative way?  If they are, then although individual platforms may perish their industries will live on.