Start-Ups – Business Structures
When starting a business, most people often think of setting up a Company. There are however a number of options for structuring a business, each with its own pros and cons. We have set out below some of the most common.
A limited company is a separate legal entity and should be thought of a separate legal “person”. The company is usually incorporated with shares, which are held by shareholders. The shareholders are effectively the owners of the company, and are entitled to the profits of the company. The company will also have directors, who make the day to day decisions on the running of the company and the business, and run the company on behalf of and for the benefit of the shareholders. When setting up a company, the shareholders and directors are often the same people.
One of the major positives in setting up a limited company is that the shareholders have less financial exposure and are not personally liable if the business were to fail. However, there are a number of costs involved in setting up a limited company, as well as requirements to file annual accounts and statements with Companies House.
This is a more traditional business structure which has historically been used by lawyers and accountants. You and your partner or partners will share the responsibility for running the business, as well as sharing the profits and costs. Each partner will be responsible for their own tax on the share of the partnership that they own.
In a traditional partnership, all partners are fully responsible for all the debts of the business, and this has meant that partners of failing business have had to sell personal assets to meet the business’s debts. You can now set up a limited liability partnership (LLP), which like a limited company, limits the liability of the partners to the amount that they have invested in the business. If you set up a LLP, this must be registered at Companies House, it must start trading within a year of registration, and all partners have to disclose their income.
If you are setting up a business on your own, you can do this as a sole trader. Effectively if you run a business as a sole trader then you are self-employed.
As a sole trader you are responsible for running the business, have the benefit of keeping all the profits of the business, but are personally liable for any debts of the business. A sole trader can employ staff, as in a traditional style business.
The main benefits of a sole trader are that they are low cost, easy to set up and you retain full control. The main disadvantage is that you have full personal liability for the debt of the business.
Whichever business structure you decide to use, it is crucial that you ensure that the chosen structure is right for you and for your business.
This is written as a guide, it is not intended to contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.
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