The ins-and-outs of structuring your business
Choosing your business model and your legal structure
Setting up a business is an overwhelming prospect for first timers, but this introduction to the different ways to create the legal structure of your business will make it easier for you to decide on the best model to put your money-making idea into action.
The different legal structures are designed to accommodate different business models. For example, styles of management, financing, business objectives, and personal security are just some factors which may influence your business model. In turn, the decision to set up your business legal structure may also be influenced by insolvency procedures and tax planning, amongst other things. If you are unsure, and need some advice, our experienced team at Legal Spark can help you find the best legal structure to suit your business model.
Setting up as a sole trader is quick and easy to establish, and is perfect for Etsy and eBay sellers, private tutors, and gardeners
Establishing yourself as a sole trader is for people who like the freedom of being self-employed. It requires that you register for tax purposes and keep proper accounts of your business activities to submit to HMRC at the end of the tax year.
· Suitable for those who prefer to be self-employed, online traders, some types of service provider, for example gardeners, cleaners or tradespeople.
A traditional partnership involves two or more people coming together to run a business with the aim of generating a profit. Usually, the partnership is regulated through a partnership agreement between all the people involved. The partnership agreement stipulates how the partnership is to run or managed and usually contains clauses regulating disagreements amongst other things.
Partners share the profits of the business; however, the partners may also be liable for the debts of the business. Importantly, sole traders as well as those operating as a partnership are taxed according to their own personal income tax structure. Setting up a partnership is a bit more complicated than registering as a sole trader, and the same goes for registering new companies. But partnerships are usually used for businesses which require direct control over the business processes but might require more capital than one can raise on their own and therefore it makes sense to work with other people.
· Suitable for Small to Medium Sized enterprises right up to larger corporations (John Lewis / Waitrose are a partnership), family businesses, start-ups and independent businesses.
· A typical example of a partnership is a firm of solicitors, an accountancy practice, or simply a group of friends coming together to open a new bar.
The Concept of Limited Liability
Running a business as a sole trader or as a partnership does not suite everyone. That is why the law has created the legal concept of ‘limited liability’.
This is a concept that can apply to both partnerships such as limited liability partnerships (LLPs) and limited companies and might be particularly attractive to you if your business idea will incur large amounts of debt in order to run. Alternatively, there may be a degree of personal risk involved in your business activities and you do not want to accept that risk yourself.
The concept is designed to protect business owners, directors and employees during insolvency, whereby their personal assets (such as their home and any money in savings accounts) are protected from the business’ creditors if the business goes bust. Likewise, if the limited company, or the LLP were to be sued because of something that happened during the business, the risk associated with that litigation was fall to the company (or the LLP) and the people involved in the business.
Like partnerships, LLPs are incorporated through a partnership agreement which should regulate the affairs of the LLP. Limited companies also have a form of constitution called ‘articles of association’ which governs how the limited company is run.
The Limited Company
As the name suggests, a limited company protects its investors, directors and staff from personal liability of any business debts.
This is because limited companies enjoy ‘separate legal identity’, as they are ‘legal persons’ distinct from the directors, managers and employees of the limited company. Thus, the profits of a company are taxed to the company itself and natural people behind the business are protected from personal liability in the event of any loss being made by the business.
Companies can be privately owned; however, a public company’s shares (PLC) may be available for general purchase. Alternatively, community interest companies are those established for the good of the community, rather than purely to seek a profit. There are a whole host of duties that the directors of a company must abide by in running the business, and Legal Spark can help break these down for you.
· Suitable for any business, but remember the company has a ‘separate legal personality’ and any trading profits / losses belong to the company not the people who run the company.
Limited companies may be ‘limited by guarantee’ or ‘limited by shares’ and deciding which one is more suitable is an important business decision that will have implications as the business grows. A company which is ‘limited by guarantee’ does not have shareholders, and many charities use this legal structure to further their non-profit business model.
Unfortunately, a company limited by guarantee will struggle to attract investment because it cannot issue shares to any potential investor. This contrasts with a company limited by shares, where investors are often given a shareholding in return from their cash investment.
Many sole-traders once established with a successful trading history, go on to incorporate a limited company to protect themselves from potential future losses and to attract outside investment.
The Big Decision
With all these options, you may want some more detailed advice to work out which is the best legal structure for your new business venture. If you are a sole trader seeking to incorporate a company or join a partnership you may also wish to seek financial advice about the tax implications of changing your business model and trading through a new legal structure.
If you require legal advice, our experience team at legal spark is here to help. A consultation can be arranged for a little as £75.
Feel free to get in touch with Legal Spark and we can help you get started.