Starting a new business has many responsibilities which will require a range of decisions to make. The first, and in some cases the most important, when starting out is which legal status your business/company will take. Which is right for you and how do they differ?
There are essentially 5 types to choose from, which are detailed below:
- Sole trader
- Limited company
- Business partnership (ordinary)
- Limited partnership and limited liability partnership
- Unincorporated association
A sole trader is defined by an individual running their own business with ultimate responsibility for the business. The benefit of this model is that all profits (after tax) can be retained by the business owner (or sole trader). On the flipside, there is no protection should the business fail with debts. You are ultimately responsible for these with no or little protection. (Whilst the business is defined as a sole trading business this does not mean you cannot employ staff.)
Record keeping â€“ you are still required to maintain records of your sales and spending and must submit your tax returns for payment to the government for tax liabilities. You however do not have a requirement to employ the services of a chartered account and can do your own accounts submission or use the services of a book keeper. This can result in savings.
A limited company is an entity in its own right and is often owned by a shareholder or shareholders. This means that there is no direct link to its operating costs and profits to the business owner or owners (shareholders). In the event the company fails, the debts of the company are limited, offering protection for the company shareholders. However, you should be aware that if you provide a guarantee for the limited company, which can often be requested, you are personally liable in the same way as a sole trader.
Profits made by the company are those of the limited company and not that of the shareholder. You are governed by the companies act and its stipulations on the company directors and company secretary. The limited company is also still required to maintain and submit accounts regularly to Companies House which detail your operating costs and profits. Any profits which the company makes are eligible for corporation tax. After which, any remaining profits can be paid to shareholders should they decide to take them. These will then be taxable by the individual under their own tax liability. Accounting for your company is required to be managed by a certified accountant.
There are 3 types of companies as detailed below: Note they are not referred to as limited which is normally reserved for private limited companies.
Private company limited by guarantee
The directors or shareholders have agreed to financially back the organisation, normally to an agreed amount, should the business fail.
Private unlimited company
Directors or shareholders are liable for all company debts, should the company fail.
Public limited company
This type of company is often referred to as a PLC. This is defined by way of the companyâ€™s shares that are traded publicly on a market, such as the London stock exchange. There are a number of markets within the stock exchange that can be traded on. You can find further information by following this link: http://www.londonstockexchange.com/companies-and-advisors/companies/companiesandadvisors.htm
Business partnership (ordinary)
A business partnership is made up of yourself and a partner or partners. The businesses shares are then shared between the partners.
All profits are shared accordingly with each partner of the business. Each partner is then responsible for the tax on their share.
Unlike limited companies, but like sole traders each partner is personally responsible should the business fail. You are also personally responsible for businesses purchases such as stock or equipment. However, if you wish to place a level of protection against this personal liability you can opt to set up a limited partnership or limited liability partnership (LLP).
Note: a partner can be a limited company which counts as a legal person.
Limited partnership and limited liability partnership
Partners within a limited partnership are not personally responsible should the business fail. Any debts accrued are not directly linked to the partners. However, any money the partners have invested in the business will of course be at risk. Although there are exceptions in the event that a partner is classified as a general partner and not a limited partner. A general partner is personally responsible for unpaid debts.
This is not a legal status and is normally reserved for an organisation which is set up by a group of people who intend to deliver services and not generate profits. The most common examples are voluntary groups or sports clubs.
There are no requirements to register this type of organisation, and to do so, will incur no costs. As this is not a legal structure any debts are the responsibility of the individual entering into the agreement of borrowing or contractual obligations they enter into.