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Home Corporate Services A Guide to Starting & Developing a New Business Choose a Legal Structure: What Kind of Business Should I Be?

Choose a Legal Structure: What Kind of Business Should I Be?

Choose a legal structure: what kind of business should I be?

What Kind of Business Should I Be?

There are four principal legal forms that a general business might take:

Sole Trader (Self-Employed)

The simplest structure, but carrying unlimited liability for the owner. Most people who start in business do so as sole traders. They work on their own. They alone receive the income and are liable for any debts.

However, with that comes danger. You're totally liable for any debts that you incur, because the business is, quite simply, you. The financial costs of starting up are minimised by working alone from home. It can be a lonely life but, instead of colleagues, you have customers.

To become a sole trader, you will need to:

Once you have registered, you will become responsible for the following:

Limited Partnership

Relatively simple but inflexible. Limited partnerships they are very rare today and account for less than 1.2% of all partnerships in the UK. A limited partnership is formed when one or more of the partners invest capital into the business but do not participate in running and managing the business. These partners therefore have limited liability as they can only lose the amount of money that they initially invested into the business.

Limited Liability Partnership

An LLP formation is similar in some ways to a limited partnership, except that the individual members have lower liabilities to any debts which may arise from running the business. Limited liability partnerships they are not rare today and account for less than 11.2% of all partnerships in the UK. There are more administrative duties involved compared to the partnership business structure. In fact, a limited liability partnership is more similar to operating a limited company.

In terms of liability, the limited liability partnership is itself liable for debts run up in running the business, rather that the individual members of the LLP. As a result, limited liability partnerships are only recommended for profit running businesses.

To set up a partnership, you will need to:

Once you have registered, you will become responsible for the following:

As a limited liability partnership, you will not be responsible for your business' losses.

Limited Company

The business is registered with Companies House and is an entity of its own. There are more rules associated with running a business this way but there may be tax advantages. Those involved have shares in the business proportional to their involvement. A limited company is regarded in law as a separate legal personality, distinct from its shareholders.

So, you can be a sole trader, a limited partnership, limited liability partnership (LLP), a private company - the choice is yours. However, before you begin trading, you need to decide which legal form of business is best for you.

The decision will affect the way you are taxed and accounting records you will have to keep. Even if you are going to work on your own from home, think about whether might be advantages in forming a limited liability partnership or a limited company.

Private Limited Companies

This is generally the best legal form for general business companies to use. Limited companies are cheap and easy to set up and they protect the directors by limiting their liability for any debts run up by the company to the amount that they have invested in it. However, this protection is removed if any director acts in any way that is unlawful, negligent or not in the best interests of the company (i.e. in the best interests of the shareholders on an ongoing basis).

The directors are also liable if the company continues to trade beyond the point when it can reasonably expect to meet its outstanding liabilities. In this situation, the directors are personally responsible for any additional liabilities incurred after the company has reached this point.

When creating a limited company, directors must be clear about their individual rights and responsibilities; the rights and responsibilities of their fellow directors; the fundamental issues that will need the unanimous agreement of all directors; and the procedures that will be put in place for resolving any disputes. Directors should make sure that they are familiar with the company's internal rules and procedures and that they read all documents (e.g. minutes of board meetings) carefully before signing them.

Being a director of a limited company carries a number of additional responsibilities. Companies are obliged to prepare annual accounts and file a copy with Companies House. Company law requires that certain information appears on all correspondence issued by the company.

Get help from Coddan to understand what type of business entity will be much suitable for your current business needs and requirements.

Self Employment vs LTD

As many know, employees have rights on how many hours a week they must work on average. Most employees do not work more than forty-eight hours a week and receive overtime pay for additional hours put in. When self-employed, however, these rules do not apply. A self-employed person could work seventy hours a week, if that is what is needed, and would get paid no overtime or nothing else additional. Because they work for themselves, their wages depend on what they bring in.

Another responsibility that is given to the self-employed is taxing their income. A self-employed person must allot for his or her own tax payments and follow the guidelines set by the government. Normal employees depend on their employers to do this task for them and are not required to worry about this.

Being a sole-trader LTD company also protects your personal assets should you business get into financial difficulty. If you're starting out a capital is restricted and you expect to earn under £20,000 then it may worth sticking to being self employed and then move over to being a LTD company when have more money available to you. Typically self employed people get a bad deal with getting competitive mortgages. The reasons why are obvious; to the lender they are a risk, an unknown quantity.

Find out the links below on the pros and cons of registering your business: -

Coddan is one of the leading service incorporation agents in the field of English, Scottish, and Irish companies formation and registration. We can help you in starting a business in England & Wales Scotland, Northern Ireland and Republic of Ireland. Over 95% of our companies are incorporated within 4-6 hours. The electronic submission of information enables a fast company creation satisfying all of the required legal formalities: a director, a secretary, a registered office address and shareholders.