If you’re starting a new business in the UK, one of the most important decisions concerns the form the business will take. There are four common ways of arranging a business, each with its own legal and tax requirements, benefits and complications.
How you decide to set up in business will be influenced by whether you plan to work with others or on your own and how you choose to structure any business relationships.
As the name suggests, a sole proprietor (or trader) owns and runs their own business. There are few rules for the individual to adhere to, as the business is not considered a separate legal entity by law. All assets and debts belong to the proprietor and profits are taxed alongside any other income the individual has.
If it’s important to you to keep your business arrangements separate, a limited company may be suitable. Incorporating a business means it has a legal identity of its own and provides some protection to its owners and shareholders, as any debts are ‘owned’ by the company. However, creditors may still require personal guarantees from owners of small businesses. Limited companies must file certain documents laying down the rights of shareholders and owners. Annual tax returns must also be filed.
Two or more partners run the business together, share responsibility for liabilities and ownership of assets. The exact way these are split can be determined by a specific partnership agreement. The partnership is recognised as a legal entity, which means there are a number of responsibilities for the partners to be aware of. For example, the business will need to file a tax return but tax will be paid by the individual partners on their specific incomes. The assets of each partner can be used to pay any creditors and partners may need to guarantee repayment of any borrowed money against their own personal assets. Partners can also sign contracts, although this process can be complicated if all partners need to be available to sign documents.
Limited Liability Partnership
Partners in a LLP are known as members and their names and addresses will need to be registered at Companies House. The main advantage of a LLP is that members will only be held responsible for a certain level of debt if the business encounters problems. The LLP exists as a separate legal entity which can sue or be sued and enter into contracts in its own right. In return, the business must file accounts annually as a public record. Members are usually taxed individually in the same way as partners are, although some members must be treated as employees for tax purposes. Although they have traditionally been used by professional businesses such as solicitors, small businesses may also want to look at this type of entity.
Need some advice?
If you are unsure about how to set up your business venture, we can provide advice and can also assist in forming the company. Please call us on 020 7330 0000.
Alternatively, read our free guide to starting a new business (PDF)