Which company structure is right for your business?
This is the first decision you’ll need to make when you start your own business, and it can be a daunting one. The choice you make will depend largely on whether you plan to trade alone or with others, and whether you’re willing to take on personal liability for business debt.
If you’re keen to keep costs and red tape to an absolute minimum, you’ll probably opt to set yourself up as a sole trader. This is the simplest possible legal structure you can choose for your business venture. Despite the implications of the name, as a sole trader you don’t have to work alone: you can employ staff.
Doing business as a sole trader has drawbacks. Yes, you’ll be entitled to make business decisions by yourself, and to keep any profits. But if your business isn’t a success you’ll also be held personally responsible for the repayment of debts.
When you prefer to keep your business responsibilities completely separate from your personal finances, setting up a limited company often makes sense. The process of establishing your limited company can be complex, so it’s essential to get good advice from your accountant beforehand. But being able to transfer any legal and financial risks to the company usually makes the increased administrative load more than worthwhile.
This legal structure is pretty similar to that of sole trader, but it can apply to any business you set up with associates, friends or family. Just the same as sole traders, partners take on personal liability for legal and financial matters. However, in an ordinary partnership, this liability is held jointly.
Although each partner pays tax on their own share of the profits, in an ordinary partnership you’re liable not only for your own business affairs, but for the affairs of the other partners, too. So you’d probably only want to form this kind of partnership with highly trusted individuals. It’s worth noting that you can also establish a partnership with an organisation such as a limited company. Ask your accountant for more information about this particular approach to partnership.
Limited Partnership & Limited Liability Partnership
These legal structures apply to partnerships whose members don’t want to assume personal liability for business debts. In a limited partnership, any liability is divided unequally amongst the partners: you’ll appoint at least one ‘general’ partner who will assume personal liability, and the other partners’ liability will then be limited to the amount they originally invested.
Aside from liability, the general partners are also responsible for the management of the business. In contrast, in a limited liability partnership there are no general partners. Every partner can potentially take an active part in managing the business, and financial liability for each individual is limited to the size of the original investment.
We understand that this kind of quick-start article often raises more questions than it answers. If you’d like to discuss which company structure is right for your business with an accountant in East London, we’re here to take your call.