Small and Medium Enterprises (SMEs) are businesses that generally operate on a smaller scale than large corporations and make up over 98% of enterprises in the UK. There are threshold requirements for assets, revenue and employee number, as well as shareholding composition within the enterprise. This blog sets out the legal requirements for a company to qualify as an SME and its distinctive legal characteristics.
SMEs: Legal Requirements
Enterprises are classed as SMEs when they have fewer than 250 employees, a turnover rate below £44 million or a balance sheet of under or equal to £38 million. In addition, there cannot be a single shareholder that controls more than 25% of the capital or votes within the business, and the business cannot control the same of another company.
The determination of whether an enterprise qualifies as an SME, when it has connections or substantial links to other entities, is not solely based on its own employee numbers, turnover, or total balance sheet.
Compliance Requirements
SME status comes with the advantage of reduced compliance burdens, such as the requirements for documents filing with Companies House are significantly simpler for SME in that they can legally disclose less information on accounts than large corporations. This lack of insight may place SMEs at a commercial advantage, and also means that management can spend less time on administrative and filing work, or that the filing need not be outsourced to professionals. These requirements mean that SMEs can save on both time and money.
Directors and Shareholders in SMEs
In SMEs, due to the smaller corporate structure, it is highly likely that the directors and shareholders are the same individuals. By carrying such a dual role, it is inevitable that they must bear certain risks and responsibilities under the Companies Act 2006. They must not allow their personal interests as a shareholder to interfere with their director’s duties to act in good faith in the best interests of the company, must exercise reasonable care and skill in their role, and avoid any conflicts of interest.
Shareholders in SMEs also hold much more power and influence than those in public companies or larger enterprises. In many cases there may only be a few shareholders, who also are directors and carry out day-to-day management and operative work. When the parties are all in agreement, it may be easy to pass resolutions quickly and propel financial development.
However, the lack of dispersion in power and responsibility can create risks and have implications in the event of disputes. The lack of extension in ownership and company structure makes it difficult for the enterprise to absorb any negative repercussions or risks arising from disagreements or disputes. Consequently, if shareholder or director relationships worsen, it can lead to instability or shorter lifespans for SMEs because of the challenge of finding replacements or reaching agreements.
If you need advice or assistance, please contact Nath Solicitors on 0203 983 8278 or get in touch with the firm online.