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I'm Starting A Business - How Should I Set It Up?

View profile for Stewart Matthews
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Whatever the type or size of the business you want to set up, it is vital that you choose the right type of business structure at the outset to suit your specific requirements.

What types of business are there?

  • Sole trader
  • Partnership
  • Limited company
  • Limited liability partnership (LLP)

How do I choose which one to use?

You need to consider the pros and cons of each structure in relation to the specific needs of your business. It is important to obtain advice from a professional, such as a solicitor or accountant, to ensure that  you make the right decision, as different factors will apply for every business.

 

Sole Trader

What are the advantages?

  • You have sole responsibility for running and managing your business.
  • It is a good way to start off in business. You can decide later, if appropriate, to form a partnership or limited company as your business expands.
  • Easy and inexpensive set up with little formality.
  • No specific legal and accounting requirements.
  • Suits a small and localised market.
  • You keep all the profits, subject to income tax and national insurance contributions.
  • You have total control and can make changes quickly.

What are the disadvantages?

  • Finance can be limited and will depend on your relationship with your bank.
  • May not be suitable if you intend dealing with larger entities.
  • You are personally responsible for the business and liable for all of its debts.

How do I set up as a sole trader?

  • The main formal requirement is that you register the business within 3 months of commencement with your local tax office otherwise you will have to pay a fine.
  • There are rules which require you to display certain information on letterheads, order forms, invoices and other business documents (including emails and your website). Generally you must state your trading name, your personal name and the address from which you trade and can be contacted.

 

Partnership

What are the advantages?

  • Easy and inexpensive to set up with little formality. No major legal and accounting requirements.
  • Good for localised or professional markets but not when dealing with larger entities.
  • Easy to expand and bring in other partners to finance the business.

What are the disadvantages?

  • You share in the management, profits and risks and are jointly liable (with the other partners) for the partnership debts. There is a risk that disputes may arise.
  • May be dissolved on death, resignation or bankruptcy of one partner.

How do I set up a partnership?

  • You will have to register your business with the local tax office as with a sole trader.
  • It is advisable to have a written partnership agreement drawn up by a solicitor which sets out the way in which the partnership will be run and financed, what is expected on each partner, what happens if a partner dies or decides to leave and how disputes will be dealt with.
  • As with a sole trader there are rules which require you to display certain information on business documents (see above). For partnerships you must state the names of each partner unless there are 20 or more partners in which case you can state that a list is available on request.

 

Limited Company

What are the advantages?

  • Your personal liability for debts is limited to the amount (if any) unpaid on your shares except where you give a personal guarantee or in certain other circumstances provided by law.
  • Limited company status is desirable when dealing with larger entities and in certain industry sectors.
  • Many more options are available for raising finance. Companies are preferred by outside investors and loans can be secured over company assets.
  • It is far easier to dispose of all or part of a company as it is possible to sell shares.

What are the disadvantages?

  • Can be complex and costly to set up.
  • A company is subject to detailed legal and accounting requirements.

How do I set up a Limited Company?

  • Register at Companies House using the necessary forms and documentation. Information on what you need to do is available from Companies House, or alternatively a solicitor can register for you, ensuring that you comply with all the requirements. Please see our factsheet on company formation.
  • There are rules regulating the company name you are able to use.
  • Once your company is registered at Companies House you will have to fulfil the requirements such as sending in annual returns, annual accounts and other information.
  • You will need at least one director. You may also appoint a Company Secretary, but for most small companies this is no longer compulsory. There are however specific requirements that must be satisfied to hold these offices.
  • You will have to register the company with the local tax office for corporation tax purposes. It is advisable to employ an accountant to ensure you comply with all the requirements.
  • Directors are charged to income tax on their salaries and any dividends received. The company is charged to corporation tax on its taxable profits.
  • It is sensible to put in place a shareholders agreement to govern the relationship between the shareholders. See our factsheet on shareholders agreements.

Limited Liability Partnership

What are the advantages?

  • Has all of the benefits and flexibility of a partnership together with some of the limited liability benefits of a limited company.
  • Personal liability is limited to the amount of money you have invested, subject to personal guarantees you have given and certain circumstances provided by law.
  • There is no limit on the number of members and the partnership does not have to be dissolved on death, bankruptcy or resignation of a member.

What are the disadvantages?

  • More expensive and complex than setting up a partnership.
  • Annual audited accounts and other information must be filed at Companies House.

How do I set up a Limited Liability Partnership?

  • As with a partnership, however forms and documents must also be filed at Companies House. It is advisable to have a written members’ agreement drawn up by a solicitor.

 

If you would like help or advice on the different methods of setting up your business then Neves Solicitors are happy to help, please contact Stewart Matthews.

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