Every business starts with a good idea. You’ve got yours. You’ve done the market research too. You’ve put together a solid business plan and calculated the cashflow forecast. You’ve done everything you need to start a business. There’s just one thing missing. Have you thought about the legal structure for your business?
There are several business structure options to choose from, including franchises, offshore companies, co-operatives and community interest companies. This blog post will focus on the most common options. Most businesses fall under one of these basic banners.
If you would like to learn how to choose a business structure and need help getting started, please don’t hesitate to get in touch. The steps to starting a business can be tricky, but help is available if you need it. But we digress. So let’s dig into the in’s and out’s of a good business structure.Sole Trader
A sole trader is, for all intents and purposes, self-employed. They must register themselves with the relevant tax authority as an independent business ready to pay taxes on earnings. Sole traders are, as the name implies, solely responsible for running their business. This means you are on the hook for all legal requirements of running a business. You can keep any profit you make after tax, but you are also the one responsible for all the debts of your business. You may hire staff to work for you as a sole trader.
Being a sole trader means you are solely responsible for the business. This has upsides and downsides. You can keep all the profits, but are also responsible for all of the debts. It does not mean you have to worl alone, however, as a sole trader can hire and fire employees as they see fit.
- Easy to set up
- Minimal start-up costs
- Full control over business
- Full debt liability
A partnership involves you and another person or persons. It is like a group of sole traders acting together. Everyone in the business takes a share of the profits and pays a share of the taxes. The “partner” in the equation doesn’t need to be a living person. For example, a limited company is considered a “legal person” for the sake of business and can constitute a business partner.
When you set up your partnership you’ll need to choose a name for the business, choose the “nominated partner” and register the business. This nominated partner is the one responsible for managing financial records, such as record keeping and filing tax returns. The partnership is defined by an agreement that outlines the liabiltiies, ownership, profit distribution, and exit strategy for each partner. The individual partners register as being self-employed and file individual tax returns. As with a sole partnership, all partners are fully responsible for business debts.
- Partnerships are easier to create and run
- Working with someone else means more potential finances
- Every partner is fully liable
- Potential for disagreements between partners
A limited liability partnership is similar to a standard partnership agreement with some small differences. There are no limits on how many partners an LLP can have, but there needs to be at least two people registered as “designated members.” These members are the ones responsible for filing annual accounts for the business and have a similar function to the nominated partner.
Forming an LLP offers some protection for your assets. As the name implies, this structure limits your liability for the business to how much you have invested in it. Partners are also liable for any personal guarantees offered when securing financing and loans for the company.
One similarity with standard partnerships is that the income members get from the business is taxed as income. Every member of the group must register as self-employed with the tax authority. An LLP should also be registered with the Companies House and there should be a members’ agreement everyone signs. This agreement outlines what share of the profits the members are entitled to.
- Combines advantages of a partnership and limited company into one option
- Individual partners must disclose income
- Limited Liability Partnerships must start trading within a year of registration
These are incorporated private companies and they are limited by shares. The company has shareholders who own a piece of the business. The creditors of the company have liability to these shareholders based on how much money they invest in the company. The personal assets of the shareholder are protected against company insolvency. Only the money they invest in the company is at risk if something goes wrong.
Every company limited by guarantee like this needs to have least one director and one guarantor. It’s possible for one person to serve as both director and guarantor. It’s also possible for there to be multiple directors and guarantors, as long as there is at least one of each.
The company directors are the people who run the business. They act in the best interests of the business and shareholders. It is possible to be both a shareholder and director as well. You’ll have to register your company, for which you’ll need;
- The registered name and address of the company
- At least one director
- At least one shareholder
- Details on the company shares
- Rules as to how the company is run, known as the “Articles of Association”
- Less individual financial risk
- Protection that comes with being a limited liability
- Increased start-up costs
- Annual accounts and financial reports are disclosed to the public
There are several business types to choose from. Each type comes with pros and cons. Which one is right for you depends on your circumstances. If you want total control of your business, become a sole trader. If you want to do business with another person, then form a clearly-defined partnership. Not many start-ups form as incorporated companies, but the possibility is there.