What is the best legal structure for my business.
We receive a lot of calls from people considering starting a business who are not sure whether they need a registered office service, a mail forwarding service or both.
When you first decide to start your business you will eventually be confronted with this difficult question. Your business may change over time and the legal structure may have to change and so it is best to consider how you will deal with this situation now.
Which legal structure you choose will affect:
- The taxes that you pay;
- The amount of record keeping you need to maintain;
- How you can raise finance;
- Who and how the decisions are made;
- Which official organisations you have to inform;
- The level of risk and collection of any debts;
If you are unsure as to the right option always seek professional advice, from an accountant or solicitor, before you make a decision, the wrong decision at the beginning can affect the business later.
The following is a very basic list of the types of business structures:
Sole trader - simplest structure and you make the decisions. The record keeping is straightforward showing income and expenses and you keep the profit. You are classed as self-employed and pay taxes accordingly. The biggest downside is if the business runs into problems you will be held personally responsible for the debts. This could mean losing car; house etc. if the lenders decide to recoup any outstanding debts and costs.
Partnerships – there are a number of types and nearly all are made up of 2 or more people or other businesses. Each individual partner is responsible for their own tax arrangements and they will register for self-assessment. The profits are shared dependent on a partnership agreement. Decisions are made jointly and it is recommended that a partnership agreement is in place to deal with any issues.
- Ordinary partnerships – any debts are shared and all are liable for amounts owing
- Limited partnerships – registered at Companies House and HMRC informed. Liability limited to amount of money invested.
Private Company – either limited or unlimited
Both are registered at Companies House, you will file annual accounts and annual returns. Directors must be over 16 years of age and decisions are usually made by Directors, who are also responsible to Companies House for informing them of any changes to the company. Profits paid to Directors via dividend and company is also liable for Corporation Tax. You may also have employees so comply with PAYE requirements, plus others such as VAT etc.
As the name suggest, limited companies are limited by shares or guarantee. As the company is a separate legal entity the Directors are not responsible for the company debt (unless they gave a personal guarantee). The Directors may lose the money they have invested.
Your choice will depend on how you plan to finance the company, your own personal tax arrangements and your aversion to risk. As mentioned previously, it is highly recommended that you consult an accountant or solicitor.