Limited company dilemma

Hollysan

Hello everyone,

Hope someone can help with this one... I have a new client, limited company, one director. He runs courses for management types and has just set up on his own, never owned a business before. He is planning to run a course starting in the summer and is asking prospective participants to pay the fee for the course up-front, in full. No problem there, but given that this is a new company with very little capital, he is planning to pay for venue costs and expenses etc out of the fees as they are paid. I have suggested that the fees should be paid into a separate account until the course has at least started, but he says the company cannot afford to operate that way, and he intends to go ahead as described.

My concern is that, if the course doesn't run, for whatever reason, he will have to refund the money. He would be trading insolvently, surely?

Any thoughts welcome.


Hollysan

PGM

He would have to refund the customers anyway? If the course didn't run, regardless of being paid into a seperate bank account?

I don't understand the benefit of that.

What could help is find venues, caterers etc, that will open a credit account. I'm sure some will give good terms to get business at the moment, and that will help the bank balance.

Monsoon

I think he'd only be trading insolvently if and when he couldn't run the courses and owed a refund, but couldn't fund them due to having spent the money already. However, caveat emptor - that's the risk you run when you pay up front to a Ltd Co I guess.

I don't think there's an obligation to keep the money in a holding account until the course has run.

You can of course advise him it would be better to have the money available, but I don't think there's any legal requirement for him to do so.

payrollpro

Actually, when you think about, thats what running a business is all about, he's incurring risk and that sets his business apart from those who trade but seem to run no risk. My way of doing this would be to get the credit accounts for things which need to be commissioned now and then wait until the numbers are at a sufficient level before finding the accommodation. That's what I do and it works well. As long as the break even point is reached you can book everything knowing that the costs are covered.

I agree with Monsoon and PGM, there is no requirement, legally or marally, to have separate accounts for advanced income and incurred costs and yes that is the risk when you commission a Ltd company to provide a service.

Not sure he could be deemed insolvent on the strength of that first venture either. The law would only step in at this stage if he had no access to finance before he even started setting it up.

Hollysan

Thank you Payrollpro, Monsoon and PGM for your replies. I have also checked with a friend who runs courses in a similar way and she doesn't keep money in a separate account, and she agreed about the risk. However, I will advise my client not to hand over any money to venues, caterers etc until he has reached break-even point (we did cost out the whole exercise, so that info is available) or agree credit accounts with them. I will ask the client to think about what he would do if the course couldn't run e.g if he was seriously ill etc, whether he would refund any money to the participants, and whether he would access to the funds to do that.

Thanks for your thoughts.

Hollysan

PGM

Hollysan wrote: »

Thank you Payrollpro, Monsoon and PGM for your replies. I have also checked with a friend who runs courses in a similar way and she doesn't keep money in a separate account, and she agreed about the risk. However, I will advise my client not to hand over any money to venues, caterers etc until he has reached break-even point (we did cost out the whole exercise, so that info is available) or agree credit accounts with them. I will ask the client to think about what he would do if the course couldn't run e.g if he was seriously ill etc, whether he would refund any money to the participants, and whether he would access to the funds to do that.

Thanks for your thoughts.

Hollysan

The problem with that is you could be breaking your contract with venues and caterers. Or probably will be breaking your contract!

It can be risky running training courses for this reason. A better alternative is a clause in your contract that lets you cancel bookings with customers/suppliers if you don't have enough customers booked on.

Monsoon

PGM wrote: »

The problem with that is you could be breaking your contract with vanues and caterers. Or probably will be breaking your contract!

It can be risky running training courses for this reason. A better alternative is a clause in your contract that lets you cancel bookings with customers/suppliers if you don't have enough customers booked on.

Agreed. And 'not paying suppliers til' means you're putting the customers money at higher importance than the suppliers getting paid. They are equal in importance but, as the customer isn't a creditor until the course doesn't run... he ends up paying the suppliers. This is fairly normal.

Is there a real danger of the courses not running?

PGM

Monsoon wrote: »

Is there a real danger of the courses not running?

We run courses where I work, occasionally they are cancelled with lack of interest, more common lately! Although we sometimes run them at a loss to avoid upsetting customers.