Partner Article

Starting a company: need to know

Setting up a company in the UK is fairly straightforward, although it involves making some decisions that will have a big impact on how the company operates in the future. For most businesses there are three options: becoming a sole trader, forming a limited company or forming a partnership. Your decision affects your legal position and responsibilities, as well as how you file your tax returns, so it’s important to get it right!

Sole trader

Being a sole trader effectively means you are personally responsible for the business - meaning you have more control over how it is run, but shoulder a much greater liability if you run into debt. In the worst case this could put your home and possessions at risk if your business ends up owing a lot of money.

However, sole traders also tend to have lower overheads as they have less administration costs. They also keep all the profits their business makes, although they have less scope to reduce their taxes. Sole traders tend to be small, specialised companies that don’t plan on expanding.

Limited Company

By forming a limited company you are creating a separate legal entity, which effectively means your risk is limited to the amount of money you have invested in the company - you will not be personally held liable for any losses it makes (as long as no fraud is involved!)

Many businesses owners take the limited company route because it makes it easier to grow and expand in the future, as well as giving the enterprise more credibility for investors and clients. They also offer better tax benefits compared with sole trading, although the paperwork is considerably more complex and time-consuming.

Partnership

In a partnership, two or more people equally share the profits, liabilities and decision-making involved in running a business. This can be a good way to get start-up capital as all partners contribute as much as they can afford. Partnerships are also less strictly regulated than companies, which can make them more flexible.

The downside of partnerships is that they work best when everybody is pulling in the same direction, and disputes between partners can be disastrous. Many draw up a “deed of partnership” at formation that sets out the procedure for resolving disputes. Partnerships also pay more tax than companies, as they are treated by HMRC in a similar way to sole traders.

This was posted in Bdaily's Members' News section by The Formations Company .