What legal structure should my business be?

This is a question we are asked quite often in our advice surgery and the simple answer is it’s a personal decision. We can advise on the differences and benefits of each structure but the final decision is down to the individual.

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Before registering the business, a sufficient amount of market and customer research should have been conducted to ensure there is a need for the product or service.

There are 4 main options when registering a business in the UK.

Sole Trader (Freelance/Self-employed)
Also known as a freelancer or being self-employed, a sole trader is the easiest and simplest way of setting up as a one person business such as a Graphic Designer or Photographer. Sole Traders are able to change to a Limited Company later.

Advantages Disadvantages
Simple to set-up and very little paperwork. Sign up on the HMRC website Unlimited liability – must pay any business debts from your own income
No official registration Finance for the business can be quite limited.
You own all of the profits after tax Unable to sell equity in the business
Record keeping is usually straight forward It can be quite difficult to sell or pass on the business
Overall control of the business  

Partnership
A partnership provides two or more people a way of running a business together. It’s a similar set-up to a sole trader except the costs and profits are shared. It is a legal entity recognised under the law and therefore you should consider drawing up a legal partnership agreement to ensure each partner understands their roles and responsibilities.

Advantages Disadvantages
More partners can be added to bring more finance into the business Each owner is personally liable for business debts even if caused by another partner
Little paperwork Disagreements between partners
Cannot be taken over by other businesses

Limited Company
A limited company is a legal entity in its own right and separate from its owners who will have limited liability for debts of the business. The company can consist of one individual who would be the director or several co-directors.  Additional money can be bought into a limited company by selling shares in the business. As the business expands, sole traders may want change the trading form to a limited company.

Advantages Disadvantages
More credibility to the business Annual accounts can be complex to produce
May be easier to raise money National insurance payments are higher
Selling as a limited company is easier If turnover reaches a particular figure, you will need to have an independent audit

Limited Liability Partnership
This form of trading does what it says on the tin, it’s the combination of being a limited company and  partnership; it’s a way of limiting liability without losing complete control of the business. This time, a partnership agreement document will have to be drawn up detailing the distribution of profits.

Advantages Disadvantages
Flexibility of a partnership Filing annual accounts
Members of a LLP are limited for losses or debts in similar way to limited companies LLP has to be registered at Companies House which does incur a cost
Taxed on profits rather than on drawings

If you would like to discuss which structure is best for your business then please book a 20 minute appointment with one of our business advisors through MyGateway or email ceo@dmu.ac.uk 

For more information about setting up a social enterprise, please visit the Gov.uk website.

 

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