Setting up or growing a business? Choose the right structure
When starting or growing a business, it’s important to consider what legal structure will give you the best chance of success.
There are several options to explore, including sole proprietorship, partnership, and limited company.
Each structure has its own legal considerations, liability implications, and tax obligations that should be thoroughly understood before making a decision.
Sole Proprietorship
A sole proprietorship is the simplest and most common structure chosen by start-up businesses.
As a sole proprietor, you have complete control over your business and its operations. You don’t need to register your business separately, and you can use your own name or a trading name. However, it’s important to note that as a sole proprietor, you and your business are legally the same entity.
This means that you are personally liable for any debts, losses, or legal issues that may arise, which could put your personal assets at risk.
Partnership
If you plan to start a business with other people, a partnership structure might be suitable for you. In a partnership, two or more individuals share the profits, losses, and responsibilities of the business.
There are two types of partnerships: general partnership and limited partnership.
In a general partnership, all partners have equal responsibility and liability. In a limited partnership, there are general partners who have unlimited liability and partners who have liability limited to their investment.
As with sole proprietorship, it’s important to understand that in a partnership, each partner is personally liable for the debts and actions of the business.
This means that you could be held responsible for the actions or negligence of your partners, potentially putting your personal assets at risk.
It’s advisable to have a comprehensive partnership agreement in place to outline each partner’s rights, responsibilities, and profit-sharing arrangements.
Limited Company
A limited company is a separate legal entity from its owners, providing the most protection against personal liability.
This structure can be advantageous if you have significant personal assets or plan to raise external funding.
To form a limited company, you need to register with Companies House and follow certain legal requirements, such as appointing directors and filing annual financial statements.
In a limited company, the liability of the shareholders is limited to the amount they have invested in the company. This means that your personal assets are generally protected from business-related liabilities.
However, as a director, you have legal responsibilities and must comply with various legal and financial obligations, such as filing annual accounts and maintaining proper records. It’s crucial to understand these obligations and seek professional advice to ensure compliance with company law.
Tax Obligations
Another important consideration when choosing a business structure is the tax implications. Sole proprietors and partners are typically taxed on their share of the business’s profits as personal income.
In contrast, limited companies are subject to corporation tax on their profits. Additionally, company directors and shareholders may receive income in the form of salary, dividends, or both, each with their own tax implications.
Choosing the right business structure is a critical decision that can have long-term implications for your business and personal finances. It’s highly recommended to consult with professionals such as accountants and business lawyers who specialise in company law.
They can provide expert guidance tailored to your specific circumstances, ensuring that you understand the legal considerations, liability implications, and tax obligations associated with each structure.
Please contact us if you would like advice about setting up or restructuring a growing business.