Limited Company, Partnership, Sole Trader? Which is best for you?
Sole trader? Partnership? Limited Company? Buy an existing business? Take on a franchise? You have plenty of choices, but which would suit you best? This chapter aims to explain the options in simple English and to help you make the right decision.
Whatever business youre going into, you can avoid a lot of complications in the future if you start on the right legal footing, says BRUCE HAYTER of solicitors Rix & Kay
Everyone has their own reasons for starting their own business. Some people are simply happy to be their own boss, escape the daily commute, and go to work in a t-shirt and jeans if they choose. Others have grander designs, with visions of themselves at the head of some great commercial empire. It can be a daunting prospect, and the rewards are far from guaranteed, but that wont stop around 400,000 people giving it a go this year alone.
Whatever your motivation, one of the key steps in setting up a business is deciding on its legal basis. UK law recognises several different types of business organisation, each with its pros and cons, and you need to work out which will suit you best.
The main considerations are
* How much liability are you prepared to accept for potential losses and debts
* Whether youre going into business alone, or with others
* How much legal formality you can stand (and afford)
* How public you want your accounts and other records to be
For the purposes of this article, lets assume youre not looking to join the FTSE 100 next week, and focus on the four business structures most commonly adopted by new start-ups.
Going it alone
The easiest way to go into business is as a sole trader. You have complete managerial freedom, own all the business assets, and pay income tax twice a year through the standard self-assessment system. You dont need any kind of legal documents or agreements to get started, and you dont have to make any of your accounts or records public: you remain a private citizen throughout.
The only downside to this amazingly simple set-up is that, while you get to keep all the profits, you also have complete and unlimited liability for any bills or debts the business incurs.
Sharing the load
Many new ventures involve friends, spouses or professional colleagues, in which case a partnership is the way to go. The key to a successful partnership is to define exactly the rights and responsibilities of everyone concerned, which means drawing up a formal agreement. The agreement will set out each persons decision-making powers, ownership of the business assets, and share of the net profits. Its also worth remembering that partners have unlimited liability for debts jointly and severally, so if one partner cant or wont pay, their liability passes to the others.
Other than the partnership agreement, there are very few legal formalities, since like sole traders, partnerships dont have to publish their accounts.
Protecting your interests
Not everyone wants the unlimited liability for business debts that sole traders and partnerships have to accept. Happily, the law allows you to avoid it, by forming either a limited liability partnership, or a private limited company. In both cases, the business exists as a separate legal entity – its a person in its own right, able to borrow money, pay its own taxes and, crucially, take responsibility for its own debts.
So why doesnt everyone do it? The main reason is the much greater formality and need for disclosure that go with the protection from personal liability. Setting up a company, in particular, exposes you to the whole weight of company law: at Rix & Kay, we spend much of our time helping clients meet the various demands imposed by this.
A firm commitment
The law regards a private limited company as a separate entity from its founders, directors and shareholders. A company owns its own assets, pays salaries to its directors, issues dividends to its shareholders, and pays corporation tax on its net profits. Its liable for its own debts: shareholders wont find the bailiffs knocking on their doors if the company over-extends itself, although as a director, you may be asked to provide a personal guarantee to a bank or landlord.
If you are starting your business on your own in the form of a limited company, it is likely that you will be both the sole shareholder and director. If you are starting the business with others – as a partnership – it is important that you arrange for a formal Shareholders Agreement to be prepared to define the rights and responsibilities of the parties involved. Your performance is also open to wider inspection, as youll have to file regular financial returns to Companies House, including a set of audited accounts, all of which are available to the public.
Until recently, partnerships werent able to limit their liability, but this has changed with the introduction of the limited liability partnership. As its name suggests, this combines most of the limited liability of a company (a partner who is individually negligent can still be liable to a person affected, although his or her partners will no longer be liable for the actions of the negligent partner) with the relatively informal structure of a partnership.
Whats right for you?
Heres a very brief summary of the main types:
Sole Trader
* Has absolute liability for all debts
* Few formalities required to set up
* Can borrow money in his or her own name
* No need to make any financial records public
Partnership
* Liability for debts is shared jointly and severally between partners
* Need a formal agreement to avoid disputes
* Money borrowed in joint names
* No need to make any financial records public
Private Company
* Company is liable for debts as a separate legal entity; individual liability is limited
* Strict legal requirements for formation
* Can borrow money in its own name (although the lender may well require a personal guarantee from the directors)
* Annual accounts and financial reports must be placed in public domain
Limited Liability Partnership
* Lower liability than a partnership, but more exposure than limited company
* Requires a formal partnership agreement
* Money borrowed in joint names
* Some public financial reporting required, but less than for a limited company
Getting the basic structure right doesnt have to take a lot of time, or be very expensive. At Rix & Kay, weve seen many businesses grow and prosper because their owners knew what they wanted and where they were going, and set up their businesses accordingly. Definitely one of those things that it pays to get right first time.
For further information please contact Bruce Hayter, Managing Partner, on 01825 761555 or e-mail brucehayter@rixandkay.co.uk
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