One of the first major decisions you will have to make as you start your new business is the form of legal entity it will take. This may be dictated by the way you have organised your operations and whether you intend to work on your own or in conjunction with others. This choice can have a significant impact on the way you are protected under the law, the way your taxation affairs are organised and the administrative basis of your business.
The three main forms of entity each have their own benefits and drawbacks, and are treated differently for legal and taxation purposes.Sole Proprietorship
- this is a business which is owned and operated by one individual. Income tax and national insurance are paid on profits arising from the trade and will normally be due in January and July each year. This is the most straightforward structure and compliance fees are likely to be lower.
The business owner is the business and any debts or liabilities of the business are also those of the owner. Partnership
- in a partnership, two or more individuals join together to run the business enterprise. Income tax and national insurance are payable on the profits of the business and are effectively allocated to the individual partners in accordance with their profit sharing ratio.
For a multi owner business a partnership is the simplest structure and a partnership agreement should be put in place to detail the rights, responsibilities and obligations of the partners. Creditors typically have recourse to the personal assets of each of the partners for settlement of partnership debts and this risk must be properly understood before entering into any sort of partnership arrangement. Limited Companies
- a limited company is a separate entity and is responsible for its own affairs. It is run by directors and owned by shareholders. Company accounts are required to be delivered to companies house each year, although small companies can restrict the information provided but it is on public record.
Limited companies provide their shareholders with legal protection from company creditors. This protection, coupled with the perception of lower tax rates, results in this operation being very popular. The responsibilities of being a director should not be taken lightly and professional advice should be sought.Summary
As referred to above any decision on the structure of your new business should not be taken lightly and professional advice should be sought to ensure that the entity you choose is most appropriate for your circumstances. Why not take the opportunity to visit one of Lovewell Blake’s free business start-up clinics to assist you in choosing the right structure for your new business. Contact Matthew Waters on 01986 873163 or firstname.lastname@example.org.