Firstly congratulations! You have an idea/product/service and you want to make a business out of it! Now it is time to get started. From the outset you need to ensure that you choose the right legal structure to help enhance your business. This post is quite hefty as it gives a brief overview of the most popular business structures. An important thing to note is that you can CHANGE your legal set up if it no longer works for you. The most conventional business structures are as follows: Sole Trader; Partnership; Limited Liability Company; and Limited Liability Partnership (LLP).
S o l e t r a d e r
Essentially, you are a one man band; it’s just you! Sole traders tend to operate in service sectors, such as photography, hairdressing, fitness training etc. There are no fees or forms to register as a sole trader. You can hit the ground running straight away and everything you make belongs to you. Your profits are taxed as income by HMRC, and you will have to register for self-assessment and fill in a tax return each year but that’s basically all the paperwork there is. HOWEVER the law makes no distinction between the business and its owner which means you are on the hook personally (your house, your savings etc) if the business fails. Additionally, since your profits are taxed as income you will be paying 40% as soon as they top £42,385 and 45% above £150,000 (ouch). So taxation and liability is a bit of an issue but insurance can mitigate against liability and if your business grows to mega profits you can just CHANGE your business structure.
P a r t n e r s h i p
Partnerships are basically an extension of the sole trader model for when two or more individuals (a husband and wife for example) work together to build the business. The partnership is governed by a partnership agreement which sets out how the liabilities (risks), ownership and profits of the business are split between the partners. It also deals with what happens if one partner wants to leave for pastures new. As with a sole trader, each partner must register as self-employed and put in a separate tax return and each partner is personally responsible for all the debts owed by the business. HOWEVER, a partner is ALSO responsible for the liabilities of the other partner (yikes). This means that you really need to know who you are going into business with.
L i m i t e d L i a b i l i t y C o m p a n y
Limited liability companies are incorporated (registered) at Companies House. They require a lot more administration BUT they tend to give your business credibility and may also make it easier to obtain investment or borrow money. Most private limited companies (there are also public ones…another post) are owned by their shareholders and are limited by shares (if the business fails each shareholder only pays the face value of its shares). It is possible to have just one shareholder (which could be you). The company is run by directors and, unlike a sole trader or a partnership, a director’s home and savings are not sought after if things go wrong. This is because the law recognises the company as a separate legal entity, effectively as a person itself. This is why Business loves limited liability companies! Your liability is LIMITED as a shareholder and the directors don’t get involved. Also limited companies pay corporation tax of 20% on their profits, very cheap compared to a potential 40% under income tax, and the company directors are taxed as employees in the same way as other people who work for the company. Limited liability companies are awesome BUT they require a lot of filing and paperwork. Too much for this post.
L i m i t e d L i a b i l i t y P a r t n e r s h i p ( L L P )
LLP’s are a relatively new creation in UK business law and are especially suited to professional services companies like lawyers and accountants. They are a hybrid between limited liability companies and partnerships as they offer limited liability (members’ assets are protected as liability is limited to however much members have invested in the business) combined with the tax regime and flexibility available to partnerships. The number of partners is not limited, however at least two partners have to be ‘designated members’ responsible for filing annual accounts. Like limited liability companies, LLPs also have to register at Companies House and there is a members’ agreement stating what share of the profit each member receives (draft this carefully).
So that’s it in a very small nutshell. When you are starting your business it is important that you have an idea of these business structures so that you can ask the right questions and encourage tailored legal advice from your lawyer. I’ll write some more detailed posts on each of the above however please drop me an email if you want to know anything specific.
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