Know your business structure – If you are thinking of starting a business one of the first big decisions you will need to make is choosing the structure of your business.
Whether you are starting your business as an individual or with others, you are not alone. There were, a record breaking, 5.7 million private sector businesses at the start of 2017 (according to statistics published by the Department for Business, Energy & Industrial Strategy).
Each business is unique and has different requirements. It is therefore essential that you have the right foundations to build your business. Our team of specialist commercial solicitors can provide you with the right advice and guidance to ensure that your business is set up to maximise its full potential.
There are generally four main business formations. These are:-
1. Sole Trader;
3. Limited Liability Partnership; and
4. Limited Company.
All of the above options are different, all have pros and cons and all have different legal and tax implications and in addition to legal advice we would always recommend that you liaise with your accountant in relation to any tax implications of any particular business structure.
A ‘Sole Trader’ is effectively a self employed individual operating a business.
You will have to register as self employed with H.M Revenue and Customs, file annual self assessment tax returns and pay income tax on your profits (as well as any other deductions). You will be required to run your business under your own name or give yourself a business name, however any business name you choose cannot use the words ‘Limited’ or ‘Ltd’, cannot be offensive or identical to any other business trade mark.
You will also be fully and personally liable for your business because your liability will not be limited in any way. As a ‘Sole Trader’ you will therefore be responsible for the actions of your business in an individual capacity, and whilst this means that you will have 100% control of your business, you will also be 100% liable for the actions/omissions of your business.
If there is more than one individual starting a business and they do not wish to incorporate their business through a formal structure such as a ‘Limited Liability Partnership’ or ‘Limited Company’ a ‘Partnership’ is the type of business structure formed.
It is advisable to have a partnership agreement drawn up to reflect the relationship between the individuals going into business together. This document will detail the rights and responsibilities of each individual in the partnership, to include the division of profits, liabilities and how much time each individual would be expected to contribute towards the business.
A Partnership does spread the burden of the liabilities of the business, whilst ensuring that the profits are distributed in accordance with a written agreement.
It is however worth noting that despite sharing the burdens of the business, each individual will still be 100% personally liable for the liabilities of the business and all individuals will be liable jointly and severally for any debts incurred.
LIMITED LIABILITY PARTNERSHIP
A ‘Limited Liability Partnership’ is a hybrid between a ‘Partnership’ and a ‘Limited Company’.
Whilst it has most of the characteristics of a ‘Partnership’ the liabilities of the partners are limited. This means that the financial obligations of the partners are reduced. Partners under a ‘Limited liability Partnership’ are still seen as self employed and some partners will be required to be designated partners for the purpose of assuming additional legal liabilities.
A ‘Limited Company’ is a separate legal entity in the eyes of the law. This means that both the company and any individuals in the company will be seen as separate ‘bodies’.
A ‘Limited Company’ must be incorporated and, if in the United Kingdom, registered at Companies House. Company documents will need to be prepared including Articles of Association. Depending on the type of company you are setting up, these may need to be specifically drafted so as to enable the company to be able to operate its business without unnecessary encumbrances.
You may choose to limit your company by either shares or by guarantee, depending on the purpose of your business or the activity being carried on by it.
Whilst there are many requirements which are required to be adhered to when running a ‘Limited Company’ and more duties placed on its directors, the benefits of operating through a company may be more beneficial.
The liabilities of the company are also separate to that of any shareholder, thereby reducing the risk in the event that things were to go wrong.
Whichever business structure you choose, or if you are still undecided and need some further advice, our specialist team of Commercial Solicitors can provide you with the assistance you require to set up your business.