Your Legal Status
Having decided that you can
make a go of your business idea the next step is to decide what structure
you will trade under. There are advantages and disadvantages to each format.
Sole Trader
This tends to be the most
popular and easiest way for a small business owner to start-up.
Features
-
only one person runs and is legally responsible for the
business
-
no formal registration process except to advise the Inland
Revenue and DSS that you are self-employed
-
you trade in your own name for example, John Smith or with a
trading name such as John Smith trading as My Business
-
you are taxed via the Self Assessment scheme. You pay tax
twice a year in January and July based on business profits
Advantages
-
book keeping is simple. You are only required to maintain a
Profit and Loss and Balance Sheet
-
quick and simple to get up and running
-
you keep all the profit after tax
Disadvantages
Partnership
This is the next most popular
way of running a small business.
Features
-
a minimum of 2 partners
-
a maximum of 20 partners
-
the partnership can operate as ‘Smith and Jones’ or under a
trading name such as ‘Smith and Jones trading as Our Business’. Where
trading names are used, partner’s names have to be shown on all
correspondence
-
no formal registration process but partners have to advise the
Inland Revenue and DSS that they are self-employed. It is wise though to
have a written partnership agreement which sets out the terms of the
partnership, for example, split of profits, leave entitlement, notice period
to dissolve, amount of capital put in by each partner. This can avoid
painful disputes if things go wrong later on
-
the partnership has to keep more detailed financial records
which include sales and purchase records, cash book, creditor and debtor
details, Profit and Loss and Balance Sheet
Advantages
-
relatively quick and easy to start, even if you decide to
complete a Partnership Agreement
-
if you are organised book-keeping can be simple
-
you share responsibility for business debts incurred with the
other partners
Disadvantages
-
you are personally liable for up to 100% of the partnership
debts
-
your personal assets are at risk and can be seized by
creditors to settle debts
-
if your partner(s) cannot met their liability you can be sued
for the whole amount the partnership owes even if you only had 50% of the
business. For example, just because there are 2 of you your liability is not
limited to 50%. If your partner has no assets, creditors can pursue you for
100% of the debt
-
being a partner you will have to split the profits in line
with the proportion set out in the Partnership Agreement or as verbally
agreed
Limited Liability
Partnership
A new form of business
structure
Features
Advantages
-
individual partner’s liability is limited to a figure agreed
by each partner
-
personal assets are protected
-
taxed the same as a partnership i.e. each partner assessed
individually
Disadvantages
Limited Company
Usually established by
businesses with a track record who want the benefits associated with being
limited and start ups with a large capital base and grand plans! However,
since the Government introduced new legislation which gives tax breaks on
limited company profits below £10,000, this structure is becoming more
popular.
Features
-
a separate legal entity in its own right and can sue and be
sued
-
owned by the shareholders
-
set up via registration at Companies House
-
annual accounts have to be submitted
Advantages
-
shareholder’s liability is limited to the extent of the money
put in
-
the company doesn’t ‘die’ along with the shareholders or
Directors
-
there is a perception that Limited Companies are more
trustworthy than sole traders or partnerships
Disadvantages
-
lots of forms to complete to set the company up
-
higher costs to set up and run
-
missed annual returns can lead to fines
Having
decided your trading format your next step is to open a Bank account.
Click here for the
next step
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