Top tips for setting up a new business
This article continues our series on what has to be considered when when setting up a new business. Today Manjit Kaur-Heer will advise on the various business-structures available to a would-be entrepreneur.
The main options are to trade as a self-employed person either as a sole trader or in partnership with others or to set up a company. There are “pros and cons” to each of these but the first step in deciding which best suits your business is to ask yourself a number of questions…
- Will you wish to be in business on your own or with others; 2. Will the others be joint owners or employees; 3. If the others are owners how much of the business will they own; 4. If you are to be a sole owner can you manage the risk on your own as well as enjoy the benefits of sole ownership; 5. What are the tax implications of self employment as against a company set up; 6. Does the nature of your business mean it will be subject to regulatory requirements that require a particular structure for instance until relatively recently all professional practices eg Solicitors, accountants etc could not be set up as a limited liability company; 7. If it is a business involving many owners eg a family concern, who will be in charge for the time being and what is the process for exit and succession planning as people move on; 8. Do you want the world at large to know your business or do you prefer the benefits of confidentiality because companies are required to file accounts and other returns which everyone can see whereas self employed sole traders and partnerships can keep things under wraps; 9. Can you accept the personal risk of insolvency if the business fails or do you prefer the protection of limited liability.
Early thought to these issues will help determine the structure of the business.
Self employed sole traders and partnerships do not have to be registered in the way that companies must be with companies house.
Set up costs for sole traders are minimal and the main requirement for registration is with HM Revenue and Customs and Excise (for tax and VAT)other than if the nature of the business requires a licence or registration of some sort.
Likewise partnerships do not have much by way of registration requirements other than those mentioned above. However partnership are advised to have in place a Partnership Deed which identifies the partners, whether they are owners or salaried partners, their respective roles and titles, what is required from each partner to ensure they all
contribute to the business, whether they are equal partners or whether different partners own differing interests, the voting interests of each if matters cannot be resolved by agreement, how partners can be made to leave if things are not working out, what happens if a partner fails eg due to ill health or bankruptcy, what happens to a partners interest upon death, whether the business continues following such an event or comes to an end and a partner’s continuing obligations following departure.
Businesses run by sole traders will cease to exist if the sole trader dies or decides to close the business. A business run as a partnership by say three or more partners can continue to exist as a business even if a partner exits though it will be a different partnership. If a Partnership Deed is not completed it will be a partnership at will.
A company should be registered with Companies House and have a Shareholders Agreement in place. Agreement will identify directors (who manage the business but are not necessarily owners although they can be) and shareholders ( who are the owners ). The Agreement should address matters equivalent to those mentioned for Partners. Companies have a separate legal entity to its owners and must file various Returns with Companies House during its’ life.
The main difference between partnerships and sole traders on the one hand and Companies on the other is that the owners are personally liable for business debts. Therefore if a business is unable to pay say its rent bill partners and sole traders can be sued personally for the debt and can lose personal assets eg a home for business debts. Company owners can have the protection of limited liability so that the majority of unsecured debts are payable by the company. If the company goes bust the debt remains unpaid. This is not the case if personal guarantees have been obtained which is usually the case for large bank overdrafts and rent due under leases. Additionally directors and shareholders can be made personally liable for various things despite limited liability if they have failed to comply with company law obligations.
Our advice is think about what you want at the outset, set up a structure accordingly and to protect yourself have in place a Partnership Agreement or a Shareholders Agreement so that you have an Agreement to rely upon if things go wrong or there is a fall out!
For further advice on setting up contact Ajmer Kang in our Commercial Department or if you already have problems our Manjit Kaur-Heer or Lorraine Walker in our Litigation department.