Deciding the legal structure of your business
Understand some of the responsibilities that come with business partnerships, limited companies and sole proprietorship.
When it comes to setting up a small business, the majority opt to be sole proprietors, or sole traders, who are singularly and personally responsible for everything it involves. A limited company is another popular way to structure a business – this involves one or more owners who have a separate identity to the business, so may be shareholders or similar. Thirdly, there are partnerships; this is a structure that sees 2 or more owners sharing responsibility of a business.
Sole proprietorship is popular because it’s easy to set up – you only need to register your name and secure any local licences and you’re ready to go.
There are risks to be aware of when it comes to sole proprietorship, however. Primarily, this is because the business owner is personally responsible for the business and any liabilities incurred by it.
When you’re ready to set up as a sole trader, there are a few things you’ll need to do
- Choose a name and, if it’s different to your name, register it with the National Business Register (some words are restricted so look into this beforehand, too)
- If you’re going to name your business something other than your own name, then you’ll also need to make sure that name is displayed clearly on business stationery and any signage
- Register as self-employed with the HMRC within 3 months – you could face a fine if you miss this deadline
- Keep a record of your finances
- Put plans into place to make sure you’ll be able to pay tax each year
Limited companies differ in a number of ways to sole traders. Primarily because limited companies register and file accounts with Companies House, file tax returns with HMRC and pay corporation tax on any profits.
Because of this, limited companies tend to involve a lot of admin. They are also subject to more complicated tax rules, so you may need to employ an accountant.
A limited company is a separate entity to the person or people who own it. This means the company finances are separate to your personal finances and you’ll only be liable for the money you put into the business.
When it comes to business, preparation is key and a partnership agreement is a very useful way to ensure things go smoothly because you’ll agree roles and responsibilities up front.
The partnership agreement sets out the full terms and conditions of the practice. They can outline anything you want, as long as everyone involved agrees.
A typical partnership agreement could include
- Duration of the partnership and circumstances in which it would be dissolved
- Working hours, holidays and leave
- Profit share and compensation
- Who owns what – including the percentage ownership of each partner and what they are investing
- What each partner’s responsible for – such as signing documents, resolving issues and making final decisions
- How disagreements will be resolved
- Terms for leaving the agreement or accepting new partners
If you’re joining a firm as a partner, check the partnership agreement thoroughly. It’s important that you agree with the terms, both regarding day-to-day things and more far-off occurrences such as retirement and leaving.
This article is for information purposes only. You should always seek independent advice before making any changes to your business.
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