From being a sole trader to forming a private limited company, there are numerous ways to structure your company. However, it pays to know which one will be the most efficient.
Most companies decide to found as a limited company, but this isn’t the only choice you have as an entrepreneur – quite the contrary. In fact, the alternatives can require less administration and offer greater flexibility. What is important to know is what each structure means.
Bivek Sharma, a partner at KPMG and head of the firm’s Small Business Accounting team, explained that as a sole trader, you run the business in your own name.
“Administration is very simple as you do not need to register with Companies House – although you do need to register with HMRC,” he said.
“The downside is that there is unlimited liability – your debtors can claim your personal assets even if your business collapses. You and the business are a single entity.”
Moving on to setting up as a partnership, Sharma explained: “This is like a sole trader structure but with more than one person. You and your fellow partners don’t need to register your business with Companies House and debtors of the partnership can claim against your personal assets if the partnership is in financial difficulty.”
As with a sole trade structure, there is the added risk of exposure to unlimited, joint and several liability for the actions or omissions of fellow partners. Mistakes can still be punished, even if they aren’t your own.
“Usually, the partners enter a formal partnership agreement that sets out how the profits and losses will be shared among them,” Sharma added.
For a limited liability partnership, it’s a case of as it says on the tin – a partnership with limited liability. This essentially means you are sheltered from the risks associated with being a sole trader or partnership, but additional compliance requirements are then necessary. A business of this structure must register with Companies House and supply financial accounts every year.
It does not have shared capital, rather interests, and governance principles are set out in a partnership agreement. A limited liability partnership has a separate legal personality away from its members and can sue, be sued, own property and exercise legal rights.
Onto the last structure, a private limited company, Sharma explained that this is the most common structure for companies. The way it differs from a limited liability partnership, he said, is the way in which shares can be issued to attract external investors.
“If you set up a private limited company, you typically become a shareholder. If the company makes profits, you may be able to distribute these as dividends, which may attract less tax and national insurance than just receiving a salary. There are additional tax incentives available to a limited company that aren’t available to other forms of business. These include schemes to help you raise external investment, to incentivise key staff hires and to encourage you to undertake research and development.
“Running the company day-to-day is the responsibility of the board of directors. The arrangements for how they will do this are set out in a formal document known as the articles of association. This is a public document and must be filed with Companies House.”
So what about the key considerations when it comes to choosing a legal structure? Sharma said: There’s a trade-off involved in gaining the benefit of limited liability by setting up as a private limited company or an LLP.
“You will need to operate the business using a formal governance structure set out in the articles of association and any related shareholders’ agreement (for a private limited company) or LLP agreement (for an LLP). In operating a company, there must be a clear demarcation between the activities and responsibilities of the directors and the shareholders. This can require discipline in practice, particularly where directors and shareholders are the same people.”
From a liability, risk and governance perspective, business owners must make sure that the decisions of company directors and shareholders are properly documented through appropriate minutes and resolutions, and that the statutory books and other records of the company are kept up-to-date and in good order.
If you’re still undecided on what is the best structure for you, then please get in contact with Business Advice and we’ll pass on your question to one of our experts.
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