The decision has been made – you’re starting your own business. Congratulations! You probably have many irons in your fire right now, not to even mention how excited (or stressed, or both) you must be. And yet, keeping a clear head is now instrumental.
Allowing yourself any hasty or uninformed decisions might later seriously tamper with your professional life and the health of your business. Certain wrong choices could not only put your career at stake, but also affect your personal life as well (you are the business owner, after all!).
The best piece of advice we can give you before you launch your business is to lay the best possible groundwork for its kickoff: that is, choosing the right type of legal structure for your business. Granted, there will be mistakes, minor and major ones, along the way, but they will get amortised much more easily if you set a solid foundation for your business goals and needs by opting for the most suitable business structure. The reason why getting it right is so important is because it has a direct impact on your level of financial liability.
Here’s a rundown of the legal structures you might want to choose for your business (please note that the specifics in this post refer to UK only):
The name says it all: As a sole trader, you’ll be a self-employed person and the sole owner of your business. This is the simplest way to register your business (which you should do as soon as possible at HM Revenue & Customs) and run it. You won’t need to pay corporation tax and the level of paperwork and red tape is likely to be insignificant.
However, keep in mind that this position holds a personal financial exposure; in other words, if your company gets in debt, you’ll be personally accountable and might even risk personal bankruptcy. Being a sole trader, you also have to file a Self Assessment tax return annually and pay Income Tax and National Insurance.
If you don’t want your personal financial liability on the line, setting up a limited company might be the right answer for you. A limited company is a separate legal entity, which means the finances of the company have nothing to do with your personal ones – you can only potentially lose the money you’ve invested in the company. To get started, the first step you have to take is to register a limited company at Companies House.
At least one director must be appointed. The limited company is susceptible to corporation taxes and has to compile annual statutory accounts. We’ve written more about the pros and cons of a limited company in one of our previous posts, so if this seems like the right fit for your business, we highly suggest you read it.
A business partnership is created when two or more people decide to form a business unit together and share profits, risks, and responsibilities. However, just like with sole traders, business partners are held personally responsible for all the debts their business is subjected to. So, be careful: Your personal liability does not only apply to debts incurred by you, but of any partner in your firm. Registration of the partnership is made with HM Revenue & Customs. VAT registration is required, but only if your revenue exceeds £82,000. Each partner files his own Self Assessment tax return, which means they are generally taxed as self-employed.
If you’re on the fence about setting up a business partnership, you’re right: The risks are bountiful, but so are the potential benefits. You’re certainly not the only one with this dilemma: Read more about it in our article, and it might help you come closer to a decision.
Limited Partnership and Limited Liability Partnership
In a limited partnership, there are two types of partners and the type of responsibilities they share: The UK government states that ‘general’ partners, also responsible for managing the business, can be personally liable for all the partnership’s debts, while ‘limited’ partners are liable only up to the amount they initially invest in the business. There needs to be a minimum of one general and one limited partner. A limited liability partnership is constituted solely on limited partners, with a minimum of two. Unlike a business partnership, this type of implies that the partners are not personally liable for the debts of the company.
Lastly, bear in mind that if one structure is right for your business at a certain point in time, it doesn’t necessarily mean it will always stay this way. Businesses grow, change and adapt, and so should the legal structure that fits best: “Unfortunately, businesses are so varied that there really is no hard and fast rule for what structure will work and it is likely that as your business grows and your aims change, the most appropriate structure to use will change too. Remember to keep assessing your business as it grows because reviewing your structure could save you money in the long run”, writes Tim Gregory of Saffery Champness for The Guardian.
Final Words: Choosing The Right Legal Structure For Your Business
If you want your future enterprise to carry off (and clearly, you do), you’ll need the most knowledgeable, helping hands on deck! “Entrepreneurs At Work – The Logistics of a Startup” is a completely free business eBook that’s going to take you through the journey of starting your own company, and help you pave your way to success from the start including choosing the right legal structure for your business.