Business Structure Options For StartUps

Have you decided to setup your own business?  If so, welcome to the exciting world of the self-employed.  Every day will bring about new challenges and you will soon relish in the knowledge that you are the master of your own destiny. However, have you taken a moment to consider how you will legally structure your new venture?  There are a number of options available, from a sole-trader to partnership to setting up a limited liability company, and each structure has its own advantages and disadvantages. To help you decide what structure is right for you, here are the options and the benefits each one can provide.

Sole-Trader

Setting up as a sole-trader is the least complicated legal structure you can chose and works well if you are simply using your own skills and do not plan to hire any employees (for example, if you are a freelancer or a builder).

Advantages of a sole-trader structure

you retain all the profits from your business

all your business information remains private

there is little paperwork involved regarding keeping your obligations to the HMRC

you retain full control over the business, without the need to confer with others when you wish to make a decision

Disadvantages of a sole-trader structure

there are no legal limits on your personal liability – if you cannot pay the business’s debts then creditors can move in on your personal assets, including your family home

you may find it difficult to raise finance or obtain supplies and therefore struggle to grow

all decisions must be made by you, meaning you can lack valuable input that can be provided by business partners or other shareholders

Partnership

A partnership is where two or more individuals decide to set up a business together.  This is a favoured structure for professionals such as accountants, lawyers and dentists.  In a partnership, all partners share profits, decision-making responsibilities and liability.

Advantages of a Partnership

low administrative requirements – a partnership is flexible and easy to run

each partner may bring start-up capital to the venture

responsibility and decision-making is shared amongst the partners

Disadvantages of a Partnership

ordinary partnerships are subject to unlimited liability

if you do not have a formal Partnership Agreement in place you risk having to wind up a profitable business if serious disagreements occur between the partners

each partner must register as self-employed and submit their own income tax self-assessment to the HMRC every year

Limited Liability Partnership

Limited liability partnerships (LLPs) are similar to ordinary partnerships; however, they offer some of the protection provided by a limited company.

Advantages of an LLP

each partner enjoys limited liability

the business has a separate legal identity which can enter into commercial contracts in its own right

a Partnership Agreement can detail the responsibilities of each partner and document the individual capital they brought into the business, making profit sharing a simple, fair procedure

Disadvantages of an LLP

documents must be filed at Companies House and these will be available to the public

taxation is the same as an ordinary partnership, with each partner paying income tax and class four national insurance on their individual profits

Limited Liability Company

You do not have to be a large organisation to be a company, sole-traders can and do set up as a company to enjoy the many advantages the structure provides. 

Advantages of a limited liability company

directors’ personal liability is limited

the company can enter into commercial contracts and take out loans as a separate legal entity

profits will be taxed using the corporation tax rate, which is set to decrease to 19 percent in April 2017

forming a company can add credibility to your business and make it easier to attract investment and larger clients

Disadvantages of a limited liability company

setting up as a company requires some initial cost and paperwork

you must, by law, file a set of accounts every year and these will be available to the public

companies are subject to more regulation than sole-traders or partnerships, i.e. you cannot take dividends if your company is not in profit

Whatever legal structure you decide to use when setting up your own business, an experienced solicitor can assist you in working out the advantages and disadvantages of each option.