opening a business - what type of business is best for you?

Setting Up a Business – What Type of Business is Best for your SME?

June 7th, 2012 by

Turn on your television and entrepreneurial spirit is everywhere. Business related shows like The Apprentice and Dragon’s Den have been prime time hits in recent years, but they give us a media narrative-led view of business start-ups, with emphasis on the triumphs and disasters of ‘in the field’ business decisions. UK2 wants to provide detailed look at how a business really gets started – through the essential decisions and processes every start-up needs to make.

We presume that you already know what it is you’re going to be selling. If not, sorry we can’t help you with that! So onto the first important decision: the structure of your business. Not just the day-to-day structure of who’s in charge and who follows orders, but the legal structure. Who owns it? Who is liable for losses and debts? Setting up your business in a sensible legal fashion can help you dodge major disasters further down the line.

There are three main ways that a small start-up is likely to form itself: as a sole trader, as a partnership or as a limited liability company (LLC). At the most basic level this deals with how owners relate to their business and what they are responsible for. Each carries its advantages and disadvantages, but sometimes the decision will be made on the circumstances you find yourself in.

 

Sole Proprietorship

  • In a case of sole proprietorship, not only is a business owned by one person, but the owner and the business are legally indistinct. The owner therefore has the right to access all of the profits the business makes after tax, but also bears responsibility for its losses. In short, the proprietor assumes all the risk as well as the reward. With less legal distinction between owner and business, there is also less paperwork and regulation to bear in mind, making the business simpler to run.
  • Being a sole trader is beneficial to somebody who wishes to assume full control of the business and not answer to partners. It allows the canny businessperson to seize opportunity as it arises rather than lose time by consulting colleagues. There are drawbacks though in that liability for payments fall with the owner and can’t be limited to the business as with other setups. This can have nasty consequences further down the line, for example if the business is sued or ordered pay damages by an employment tribunal.
  • To register as a sole trader you must register as self-employed with HMRC within three months of the last day of the month which you begin trading. If you wish to use a business name different to your own you must first check that it does not infringe on any registered companies or trademarks. If you register with the National Business Register they will perform these checks for you, or you can hire a solicitor to do so.

 

Partnerships

  • A general partnership involves two or more people holding joint ownership of a business. By default a general partnership will legally split the company evenly between all partners, but often parties will agree beforehand on how the business is to be split.
  • General partnerships allow for shared responsibilities, alleviating some of the risk associated with sole proprietorship. However a level of trust is assumed between partners that the other will not make poor decisions that affect the entire business, and therefore their partners, in a negative way. This suits businesses that have been established by two or more people who feel confident in each other’s reliability and competence, and feel comfortable sharing control together. Considerations must also be made for the event of one or more partners leaving the business.
  • To register a general partnership, all partners must be registered as self-employed, and the business itself must be registered with HMRC. It is not necessary to have a written agreement stipulating the terms of the partnership but it is strongly advisable.

 

Limited Liability Companies

  • These forms of partnership differ to a limited liability company (LLC). Firstly, as a company, a business is a legally distinct entity from its owners, recognised by law as a ‘person’. Debts and losses are sustained by the company and not by its owners, reducing the personal risk to the business’ operators. Like a limited partnership, an LLC has investors who are responsible for debts and losses only up to the amount they originally invested.
  • There are further advantages to a business becoming an LLC. Owners benefit from better tax deals and lower rates. Companies House will not register a business name that is the same or too similar, offering a layer of brand protection. Furthermore, the ability of owners to appoint nominees allows them to remain publically anonymous. This particularly suits those looking to raise finances easily for business pursuits and maintain some distance between the business and their personal assets.
  • To register as an LLC a business must be incorporated under the Companies Act 2006 by Companies House. You can find out more information from their website.

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2 Comments

matthew
# 7th June, 2012

hiya

im not sure about the part where you say “LLC owners have rights to anonymity, protection of name from Companies House”

with very few exceptions, companies house requires the names (and home address) of all directors to be submitted to the public record, and are available from their website for a nominal fee.
you also have to submit the details of major shareholders, i’d go so far as to list the lack of anonymity as one of the major downsides to starting a limited company rather than an advantage

to give an example, http://wck2.companieshouse.gov.uk/aa7f0c74ef8e83d535bbc608a1115b54/wcprodorder?ft=1 is uk2’s entry.

also it might be worth mentioning limited liability partnerships, which have the same transparent tax advantages of a regular partnership, without the inconvenience of being personally liable for the other idiots mistakes.

http://wck2.companieshouse.gov.uk/aa7f0c74ef8e83d535bbc608a1115b54/wcprodorder?ft=1

http://en.wikipedia.org/wiki/Limited_liability_partnership#United_Kingdom

Tim
# 19th June, 2012

Hi Matthew

Thanks for commenting. The part you’ve quoted was poorly written so I’ve changed it. It is meant to read as Companies House protecting your name from being infringed by others, rather than LLC status protecting your identity from CH.

Thanks for flagging it up!

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