When starting a new business it is important to decide early on how that business will be structured.
There are a number of factors to consider when deciding whether to be a limited company, sole trader, partnership or limited liability partnership. Setting up as a sole trader is the easiest way to start as the owner chooses a name (being careful not to breach any intellectual property rights of other businesses), informs HMRC of what they are doing, opens a bank account, might register for VAT, and away they go.
Whilst operating as a sole trader is certainly very easy to set up, there is one big consideration which many overlook. By trading in this way, all of the personal assets of the trader are at risk in the event that the business finds itself in difficult financial circumstances. This means that the sole trader could lose their house, car, savings, etc.
Limited liability companies on the other hand exist as a legal “entity” in their own right, separate from the owner(s) (the “shareholder(s)”). The shareholder is liable in the event of financial difficulties (provided there has not been any wrongdoing), only for the paid up value of their shares (most small companies have shares which each have a paid up value of £1). This means
that technically, the shareholder’s personal assets are safe.
However, in the real world things are often a bit different. In the event that a company needs to borrow money, the lender will often ask for a “personal guarantee”. The effect of this is that the person giving the guarantee backs the loan with their personal assets and, as a result, the limited liability benefit of a company disappears. Even with this possibility, many people still choose to incorporate their businesses as they feel that it looks more substantial to customers and suppliers.
If more than one person is going into business and they don’t want to have a limited company, they could form a partnership or a limited liability partnership. Partnerships which are not incorporated are subject to some very old laws and as such it is advisable
to prepare a very detailed agreement between the partners. This should set out how the partnership will work, what the partners will draw, what will happen if it doesn't work, etc.
Limited liability partnerships are similar in nature to limited companies in many ways (they are a separate legal entity, they must
report financial information, etc). They are often favoured by professional business (solicitors, accountants, etc) but can be a good choice for other sectors as well.
There are a number of considerations for new businesses. When considering what is best for you consider the legal issues (we are happy to discuss these in more detail as we have set out brief information here), and make sure you talk to your accountant as the tax issues of the different structures must be taken into account.
By Daniel Gardener
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