Q: “What Legal Structure is best for my business?”
So you’ve a great business idea, done all your cashflow projections and sorted a marketing strategy. But what is the best legal structure?
A: The main 4 options for a Start-Up:-
Being a sole trader means you’re self-employed. Register with HM Revenue & Customs (HMRC) for self-assessment when you start trading. You’re responsible for your business, can keep profits after tax, but are personally liable for business debts. You can hire staff, and taxes depend on your profits. You can file taxes online or on paper. If you’re a sole trader you need to pay income tax and National Insurance subject to thresholds for profit generated.
Business owner, keeps all profits, but personally liable for losses.
Low cost and easy to set up, but full liability for debts.
Partners personally share business responsibility and profits, each paying tax on their share. A partner can be a person or a legal entity. A partnership agreement document outlines the liabilities, ownership, how profits are to be shared and what happens to one partner in the event the other wishes to leave or passes away.
Formalities: Choose a name, nominate a partner, and register with HMRC. Partnership agreement outlines details. Partners are fully responsible for business debts.
Between individuals sharing management and profits.
Easier setup, potential for finance, but full liability for all partners and need to plan for possible disagreements.
Limited Liability Partnership (LLP):
No limit on partners, but at least 2 must be ‘designated members.’ The LLP protects members’ assets, limiting liability to investments. Profit is taxed as income, each member is self-employed. 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 finance. There should be a members’ agreement stating what share of profit each member should receive.
Formalities: Register at Companies House, need a members’ agreement.
Summary: Some/all partners have limited liabilities, combines elements of partnerships and corporations. Offers flexibility but requires disclosure of income and must start trading within a year of registration.
Incorporating a Limited Liability Company (Ltd):
Incorporated and limited by shares. Shareholders’ liability is limited to their investments. A private company is incorporated and limited by shares. This means that the company has shareholders and the liability of the shareholders to creditors of the company is limited to any money they originally invested. A shareholder’s personal assets are protected in the event of a company insolvency, but money invested in the company may be lost. Directors run the company on behalf of the shareholders but it is possible to set-up with one person acting as sole director and shareholder.
Formalities: Requires registration with Companies House, involves setup costs, annual return reporting and accounts are public. A shareholder’s agreement should be entered into to cover any potential issues down the line such as one founder wishing to leave and get a job or move on to another venture. Protecting your position early on avoids costly disputes and time spent trying to agree on what shares are worth.
Summary: Private company with owners liable only up to invested capital. Less personal financial exposure, limited liability protection, but involves setup costs and public financial disclosures. Shareholder’s agreement is necessary.
For the purposes of this article we have concentrated on the most common structures but others, such as franchising, are available. For further assistance, contact one of our team to explore your options.