North London Accountants – David Grant

OK, so you are considering setting up a new small business. Are you making the same mistake that many new entrepreneurs make by not giving adequate thought or consideration to the structure and form of the business?

If you do not include deciding the correct structure in your planning at the very beginning, you may have problems later on.

The business can basically take one of four business structures (or entities). There are:

Sole trader:

As the name suggests, this simply means that you set up your business on your own. Effectively, you are your business. The business is an extension of you personally in all respects and is therefore the simplest and most uncomplicated way of doing business. Many small businesses start this way and the structure may be fine for straightforward businesses such as plumbing or carpentry or gardening and you can just start doing business without any fuss. However, some of your customers may require that you trade as a limited company in order to do business with you. It should also be remembered that if you register for VAT as a sole trader, it covers all of your personal activities.

You may wish to consider other structures for more complicated businesses where multiple skills and other complications come into play. You should also keep in mind that, as a sole trader, you are personally liable for all the liabilities of the business and in regard to any claims of negligence, which may arise.

You should also be aware that you are paying Income tax and National Insurance in a different way to which you would in other business structures, and that this may be disadvantageous.

Partnership:

This means that you work with other people as partners and that you all conduct the business jointly. In its simplest sense, it is like being a sole trader but there are a few of you who are all jointly in the small business together. It is advisable to document the business understanding in as much detail as possible laying down rules for how you’re going to operate and covering areas such as decision making, profit-sharing or drawings from the business. This is to avoid, as far as possible, any major disagreements or misunderstandings in the future. In the case of a partnership, each partner is individually liable for all the debts of the partnership.  It is advisable to obtain the services of a Solicitor to draft a partnership agreement.

Limited Liability Partnership:

This is a relatively new form of business organisation which is a mix between a partnership and a limited company. It runs like a partnership but the liabilities of the partners are limited as in the case of a limited company. Records have to be filed with Companies House much like a limited company.  There is also a small cost involved in preparing and filing an annual return with Companies House.  The taxation, however, is like a partnership. There is no constitution, as there is with a company.  For this reason, it is advisable to obtain the services of a Solicitor to draft a partnership agreement for the LLP. The LLP accounts, like those of a company are on public record, although these may be Abbreviated Accounts for small businesses.

Limited Company:

A limited company has the benefit of being a separate legal entity and you can therefore keep your personal affairs totally separate to your small business.  Your liability in this case would be limited to whatever you invest as share capital, unless you are trading whilst insolvent.  There could also be possible tax benefits though they should not be your sole consideration. There are a lot of rules and regulations governing limited companies and you will not have the flexibility or the freedom of the other types of business organisation. There is also a small cost involved in preparing and filing an Annual Return with Companies House. The company accounts, like those of an LLP are on public record, although these may be Abbreviated Accounts for small businesses.

Among the many advantages of setting up your small business as a private limited company in the UK are the following:

• limited liability of the shareholders
• officers of the Company are not personally liable (unless they are guilty of misconduct)
• there are often significant tax benefits to be had because governments all over the world encourage the formation of companies.

Each of these structures has pros and cons.  It is often difficult to change from one structure to another.  Therefore, invest the time necessary in talking with an experienced small business accountant, who will guide you to the structure that is best for you.

David Grant – North London Accountants