Start Up Sunday Week 2 - Company Structures: What's the difference & what option is best for you?

Welcome to the second instalment of our Start Up Sunday series. Before we start, I would like to stress that the information we provide is designed to be a guide to help support you and your business, it is not to be taken as professional or legal advice.  We are drawing on our collective knowledge of the UK system. If you live outside of the UK, please consult a local business advisor.

Today we will talk about your company structure. Each company entity has its own advantages and disadvantages. You need to consider these carefully as, unfortunately, there is no "one size fits all"l solution. You will probably find this to be one of the first hurdles in your quest to have a thriving and profitable business.

Firstly we have Sole Trader; you may more commonly hear this referred to as self employment.  This is a business owned by one person. Legally, the person and the business are one and the same. All financial risks are taken by that person and all that person's assets are included in that risk. You are obliged to keep careful and accurate business records detailing your income and expenses. If you work from home, you have to divide your utility bills accurately to account for what is business usage. Working from home may also have implications for your home insurance policy.

When you first set up as self employed, you have to register with HMRC.  We will cover this in more depth in Week 5. As a sole trader, you are totally and personally responsible for any debt or legal compensation your business becomes liable for so please check you are adequately and totally insured as you could, quite literally, lose everything you have worked for.

To recap, Sole trader:

Pros:

• Your business is your own
• You can make all business decisions (presuming they are within the law) yourself and without interference
• Admin costs are relatively low and you have to keep records for HMRC only

Con:

• You are solely responsible for the companies finances, if it all goes wrong personal bankruptcy can occur

The next business type we will look at is the Partnership.

A partnership is a business run by two or more people together. There should be a written agreement detailing this arrangement. Profits are usually shared between partners according to the agreement. Although profits may be shared unequally, liabilities which may arise are shared jointly. This is something that everyone involved should be very clear about. Even if you only own 1% of the business, you will still be responsible for 100% of the liability. You have the same record keeping obligations and liabilities as a sole trader.

Pros:

• More money can be initially raised on start up
• Records need kept for HMRC and you can share the workload. 

Cons:

• The same as a sole trader, personal assets are at risk if the business fails, bankruptcy is a possibility.

This moves us on to a Limited Liability Partnership. A LLP give the benefits of a partnership while limiting your liability, protecting your personal assets. You have to register it with companies house using a process similar to registering a limited company. The LLP will be a separate legal entity and, while the LLP itself will be liable for the full extent of its assets, the liability of the members will be limited. Under certain circumstances, however, claims for economic loss could be made against individual members who have been negligent. The business itself is controlled by the 'designated members' and the Members. Designated members have responsibilities similar to that of company directors. You can find out more by visiting the companies house website here.

Pros:

• An LLP is a alternative corporate business vehicle (being introduced April 6th 2001) that gives the benefits of limited liability but allows its members the flexibility of organising their internal structure as a traditional partnership. 

Cons:

• LLP have much more complex requirements for record keeping and returns. Yearly account must be filed with companies house as well as members and designated members completing their own personal returns.

Finally we come to Limited Companies. Unlike a Sole Trader or a Partnership, the Limited company is legally a separate entity in its own right. The directors and shareholders have limited liability. When a limited company is created it will have an Authorised Shareholding which specifies the limit of a shareholders liability. This means your personal assets are safe. A limited company needs to be registered with Companies House, you must also hold an AGM with all the shareholders within 18 months of formation and no longer than every 15 months after that. These meetings must receive, and approve, Annual Reports from directors and auditors. These reports must include summaries of the accounts, names of the directors, details about the shareholders, and other information. At these meetings, the shareholders must also elect directors and auditors. You must submit annual company returns to Companies House for inclusion in the Annual Reports. These are available for public inspection.

A limited company will always have staff as the Director of the company is considered to be an employee and a limited company must have at least one director and a company secretary. This means you would have to operate a PAYE scheme. We will briefly touch on this in Week 5. A limited company will have to pay corporation tax on all profits.

Pros:

• A limited company can protect a director, who act within the law, from legal actions brought against them. 

Cons:

• There is significantly more paperwork involved in running a limited company than any other option. You cannot keep your business affairs private and there is a small charge yearly for submitting your annual accounts to companies house.

In conclusion, from a record keeping, tax and NI perspective, you are usually better off being a sole trader or partnership - however, very few partnerships outlast a business. Indeed, many very good friends who have a long standing and stable friendship often turnout to be shockingly bad business partners.

We hope you've have enjoyed Week 2 of our Start Up Sunday series - please make sure to check back with us on Sunday 20 June for Week 3.