Advantages, disavantages and technicalities of setting up business ownership.
In the previous article we looked at some of the legalities around working for yourself as a sole trader. This is the most common start-up route due to its low cost and simplicity, and quite adequate for most new business owners.
However there are considerable benefits to be had from the other forms of business ownership. In this guide we will look at partnerships and limited companies.PARTNERSHIPS
There are two types of partnership – Full and Limited Liability. Full partnerships work in a similar way to sole traders, and are the assumed legal status where there is more than one owner of a business (unless it is incorporated as a limited company). They can have a maximum of 20 partners, with the crucial characteristic being that every partner is ‘jointly and severally liable’ for all debts and actions of the business. This means that what one partner signs for in the name of the partnership, all the others are liable for that commitment in the eyes of the law, even if they have invested different amounts of capital into the partnership. As with sole traders, partners stand to lose their personal possessions if the debts of the partnership cannot be paid.
As with sole traders, each partner must be registered with HMRC as being self-employed. There should be a ‘deed of partnership’ in place, which is a document to clearly define the roles, contributions and responsibilities of each partner. Partnerships are governed by the Partnership Act 1890 and in the event that an issue arises amongst the Partners in a Partnership that is not covered by the deed – or where there is no deed – then the provisions of the Partnership Act 1890 as amended shall govern the dispute.
Limited Liability Partnerships (LLP) are common but not limited to solicitors and accountants. They allow for two different types of partners – General Partners who are ‘jointly and severally liable’ for all debts and actions of the business, and Limited Partners who are only liable for the capital they have invested into the business. There is no limit to how many partners can be in an LLP.
More information on how to form an LLP can be found at Companies House (Companies House is the Executive Agency of the government charged with registering companies in the UK).
The benefit of LLP’s is that they give Limited Partners the protection usually reserved for owners of limited companies, yet retain the organisational flexibility and tax status of a Partnership.
The two most significant benefits of trading as a limited company are that the owners / directors of the company are not personally liable for debts incurred by the company, and that the fact of being one, with Ltd after your business name, confers much more respect and impression of size than would be the case with a sole trader or partnership.
It should be noted that you do not have to be a limited company to employ other people in the business, nor does it determine whether or not you should register for VAT (see last week’s article).
The main disadvantage of operating a limited company is the ongoing administration (actually setting one up is fairly straight forward). Amongst your legal requirements are that you must:
• keep a full record of income and expenditure, assets and liabilities. These must be kept for at least seven full tax years.
• pay income tax and national insurance contributions for any employees including for yourself, if you are paying yourself a salary
• file annual accounts at Companies House. These are available for the general public to view if they wish. The annual accounts must include a profit and loss account and a balance sheet. If your turnover is in excess of £5.6 million or your balance sheet totals more than £2.8 million you will also need to provide an Auditor’s report from a qualified Auditor.
• complete an Annual Return each year to confirm basic details relating to the company, such as who the current shareholders and directors are, and confirmation of the registered company address.
• complete an annual corporation tax return and pay the amount of tax and National Insurance due within nine months of the Company Year End.
What you need to register a limited company
• At least one person who is named as a director
• At least one Shareholder (this can be the same person as the director). The Shareholder owns shares in the Company, which can be a nominal single share worth £1
• A registered office address which appears on public records and is where all statutory documents from Companies House will be sent.
It is possible to register your limited company directly with Companies House but there are several online company formation companies which will carry out the process for a small fee.
More information on forming a limited company can be found at Companies House.
Limited company documentation
The key documents you need (these will be provided by the company formation company if you use one) are:
• The Certificate of Incorporation which states your company registration number, company name and date of incorporation.
• The Memorandum of Association which defines what the company will do, the company name and registered office address, and contains statements referring to limited liability, authorised share capital and share price.
• The Articles of Association which state how the shareholders and officers will run the company, such as voting rights, dividend policy and how directors meetings will be run.
Salary vs Dividends
It can be much more tax efficient to pay yourself dividends from the profits rather than a large salary. Should you go down this route, it is definitely worth investing in a tax advisor.
It’s mine… isn’t it?
A limited company is a separate legal entity – almost a living being in its own right. The obvious advantage as explained earlier is that any debt incurred by the company belongs to the company and you, its owner, are therefore not personally liable should things go badly.
However by the same principle, the assets and profits of the company do not belong directly to you even if you own 100% of the company. This means you have to be very careful about how you spend the company’s money, especially in buying goods and services for yourself that are not strictly for the running of the business (these are considered a ‘benefit in kind’ and there are tax implications). If you want to take money out of the business it must be done in a certain way. This is another reason why you must invest in a professional accountant so that you don’t inadvertently fall foul of the law.
In the next article we will look at some legal requirements that apply to all business owners, whether sole trader, partnership or limited company, in particular the different types of insurance.
HAMILTON BRADY LTD
Tel: 0844 873 6081
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Address: Springfield House
Water Lane, Wilmslow, Cheshire, SK9 5BG
You should always seek advice from an appropriately qualified solicitor on any specific legal enquiry. For legal advice regarding your case, please contact Hamilton Brady for a Consultation with a Solicitor on 0844 873 608.