So you've decided to start a business. Congratulations! One of the first things you'll need to do is decide the legal status of your new enterprise.
Making the right choice will mean maximising profitability while balancing the needs of everyone involved- your associates, bank, landlord, HMRC and, of course, your customers.
But how do you know which business model is best for you? That's where we come in. We can help you decide which path to take and then walk you through the entire journey- right down to your taxes.
Here's a quick overview of your options:
If you're going solo, you can start out with little more than a business bank account in your name or your trading name.
Pros of being a sole trader
- Flexibility- it's easy to change to a partnership or limited company later
- Easy banking- a bank account in your own name or trading name will do
- Less paperwork- there are no procedures or forms to fill in to get started
- Simple accounting- just annual trading accounts and a personal tax return
- Fast- it's the quickest way to get up and running
Cons of being a sole trader
- Personal unlimited liability- you'll have no protection from business debts
- Lack of credibility- some businesses will only deal with partnerships or limited companies
If you're going into business with others as a limited company, the status of your enterprise will be a partnership. It's important to draw up a proper partnership agreement before diving in, to avoid disputes further down the line.
Pros of partnerships
- Flexibility- it's easy to switch to a limited company later
- A clear reference point for individual partner shares of benefits and liabilities
- Statement of partners' expected duties and commitments
- Dispute resolution guidance
- Simple taxes- partnership assessment with income tax due personally by each partner
Cons of partnerships
- Partner guarantees- these personal obligations may be required by a landlord or others
- Unlimited liability- all partners are liable 'jointly and severally' for mutual partnership debts
- More paperwork- annual accounts, minutes of meetings, plus partnership and individual tax returns
A limited company is a separate legal entity from yourself, and is dictated by the Companies Acts regime. Things get a little more involved if you decide to go this route- which you can do solo or with others- but it has its upsides, too.
Starting a limited company shouldn't be done lightly, because it comes with a number of legal obligations. Here's an overview:
- The officers of the company are the directors (and secretary) who are appointed
- The shareholders are those who may put money into the business (including directors)
- The company is governed by the articles of association
Pros of limited companies
- No personal liability- your liability is limited to the company's assets (although there are exceptions to this general rule)
- Clear statement of those who have interests in, responsibilities for and control of the company
- Separate taxes- your personal tax affairs will be separate from those of the company
- Online Companies House administration
- Directors' benefits, rights and obligations contained in separate Contracts of Employment
Cons of limited companies
- Inflexible- statutory regime for incorporation (and dissolution)
- More paperwork- company formation package, books and ongoing record-keeping
- Need to maintain a Registered Office address
- Detailed accounting- annual audit, Companies House and corporation tax returns, annual Confirmation Statement
- Separate banking- a full company business account is required
- Personal guarantees- Landlord and other creditors may require directors' personal guarantees
There are plenty of do-it-quick business set-up services out there. But if you want to work with an experienced team who'll take time to understand your personal circumstances and the best options for you, then walk you through every step of the process, Blair Cadell can help.