You’ve got a great business idea, you’ve done all the relevant market research, you have a bulletproof business plan, and you’ve forecasted your first quarters’ cash flow, but have you considered business’ legal structure?
There are a vast majority of business legal structures, including community interest companies, co-operatives, offshore companies and franchises but today we’ll focus on the 4 most commonly chosen routes by business owners.
A sole trader is considered to be a self-employed entity. This means you must register with HMRC (HM Revenue & Customs) for self-assessment as soon as you start trading.
A sole trader is responsible for running their business and for meeting the legal requirements that come with it. As a sole trader, you can keep any profits you make after tax, however, you must also take responsibility for any debts of your business.
A sole trader can also employ staff.
If you register as a sole trader you will need to pay income tax and National insurance subject to thresholds for profit generated.
You can submit your tax return online, or you can be slightly old-fashioned and submit a paper application.
A sole trader is the owner of their business, they are entitled to keep all profits they make, but are responsible for all losses the business makes.
Reasons to become a Sole Trader:
- Low cost
- Easy to Set up
- Full control retained
Reasons against becoming a sole trader:
- Full liability for debts and losses
You and your partner(s) will personally share responsibility for your business and it’s actions. Partners share the business profits, and each of the partners will pay tax on their share of the business.
A partner does not actually have to be a person. For example, a limited company can count as a ‘legal person’ and can also be made a partner to a business.
When you set up a business partnership, you will need to do the following 3 things
- Choose a name
- Choose a nominated partner
- Register with HMRC
So, what is a nominated partner? Companies house defines a nominated partner as the person/entity that is responsible for managing the partnerships tax returns and record keeping.
A partnership agreement will outline the ownership, the liabilities, how the profits of the business are split and what happens if one partner wants to leave the business.
Be aware, each partner of the business must register as self-employed and submit a separate tax return of their own.
In a standard partnership, all partners are fully responsible for all debts owed by the business.
A partnership contains 2 or more individuals who will share management responsibilities and splits of any profits made.
Reasons for setting up as a partnership:
- A partnership is generally easier to form, manage and run
- There’s more potential to raise finance
Reasons against setting up as a partnership:
- Full liability for any debts is shared out amongst all partners
- Partnership disagreements
Limited Liability Partnership (LLP)
In this legal structure, the number of partners that you can have is not limited, but at least 2 have to be ‘designated members’ who are responsible for filing annual accounts.
Just as with a limited company, the LLP model protects its members’ assets, limiting their liability to however much they have invested in the business and any personal guarantees they may have given when raising loans to finance the business.
As with an ordinary partnership, the partners’ share of the profits the company makes is taxed as income, so for this, each partner must register with HMRC as self-employed.
LLP’s must also register with companies house and there should be a partnership agreement that states what share of the profit each partner will receive.
So with an LLP some or all of the partners will have limited liabilities, and the business will exhibit elements of a partnership business and a limited company or corporation
Reasons for setting up as an LLP
- Can be incorporated within the Partnership agreement
- Advantage of being a combination of a limited company and a partnership
Reasons against setting up as an LLP
- All partners must disclose income
- LLP must stare to trade with a year of registration – or be struck off.
Limited Liability Company (LTD)
A private company is incorporated and is limited by its shares.
This means that the company has shareholders and the liability of the shareholders to creditors of the business is limited to any money they originally invested in getting the business off the ground.
A shareholder’s personal assets are protected in the event of the business becoming insolvent, but any money invested in the company may be lost.
A business limited by guarantee must have at least one director and one guarantor. An individual may assume both positions, or there can be multiple directors and guarantors.
A director of a business can runt he company on behalf of the shareholders.
Limited companies must pay an application fee and be incorporated with Companies House. You can register online and you’ll need the following:
- The business’s name and registered address
- At least one director
- A least one shareholder
- Details of the companys shares
- Rules about how the business is run – these are known as articles of association.
A limited company is a private business whose owners are legally responsible for its debts, but only to the extent of the amount of capital they actually invested.
Reasons for setting up as a limited company:
- Less personal finance exposure
- Limited Liability protection
Reasons against setting up as a limited company:
- Involves set up costs
- Annual accounts and financial reports must be placed in the public domain.