When you’re setting up in business it’s essential to choose the right legal structure. Though you can change your legal form in the future, this will take time and money.
You have four main choices: sole trader, partnership, limited company and limited liability partnership. Other options can be used for social enterprises that aim to benefit the community.
In this article we’ll have a basic look at what social networks are, how to pick one and the best way to get noticed once you’ve started posting.
Identifying the best choice involves balancing a range of factors. These include the level of personal liability you are willing to take for business debts, your personal tax position, the level of administration you want to do and how you want your business to be perceived.
Getting the right form for your business can also help prevent working relationships from turning sour — one of the major causes of business failure.
If yours is a low-cost start-up and you are not likely to need to borrow to grow the business then this may not matter too much, but it can’t be stated too many times that as a sole trader you alone pick up the bill for any commitments made in the name of the business.
Being a sole trader can be a lonely and exposed position. The advantage of being your own boss is counterbalanced by not having anyone to validate your path. You are liable for debts, but also future liabilities. If you are sued you might go bankrupt: as with personal debt your assets – your house and family – are exposed.
A partnership is for you if you are offering services with people you know well. Many building and domestic services firms are either sole traders or partnerships, but bear in mind that if you hope to gain sub-contract work from larger companies you may need to incorporate to satisfy their guidelines.
In a standard partnership, as with sole traders, all partners are also responsible for all the debts owed by the business. This doesn’t only apply to debts you have incurred as a partner but to those of any partner, so you need to pay particular care to the conduct of the people you go into business with.
Personal risk is generally limited to how much you invest in the business and any personal guarantees given to obtain finance (such as bank loans).If the business goes into liquidation owing money, any outstanding creditors are paid with money from the sale of the company’s assets. Company debts should not affect directors’ personal credit ratings.
You must draw up a memorandum of association and articles of association (you can use standard model articles provided by Companies House). These set out who is forming the company and how it will be run: for example, how decisions will be made and how shares will be dealt with.
The memorandum and articles must be sent to Companies House along with form IN01. You can register online if you are using the model articles.
You must nominate at least one director of the company. You are not required to appoint a company secretary, but you may do so if you wish. It is possible for a director to hold both roles.
An LLP has the organisational flexibility of a partnership. Members share management responsibilities and you may be able to introduce new members to raise money.
Each member’s liability is limited to any personal guarantees they have made to secure finance and any money they have personally invested.
You need to register with companies house and have many of the same obligations as a Limited Company.
This is the briefest look, and we haven’t even mentioned other forms such as Community Interest Companies of Social Enterprises, for companies with a social benefit. You can see that which form you choose is a tough decision, and the impact of that choice is complex.
This is why we recommend professional advice, even if it’s only in the planning stages and you then choose to establish the business yourself.
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