How many of us can relate to this scenario – bear with me, I promise it’s relevant – you wake up, think of an exquisite meal to cook that evening, only to realise hours later you have no idea how to begin or in fact what the difference between a fish slice and a spatula actually is?!
Well, the same scenario can be applied to any budding entrepreneur! You may have a brilliant, world changing idea, but be completely in the dark about how to get your start-up business off the ground, or what legal entity it should take – see, I told you it was relevant. It can so often be the case that while you may be an expert in your field, you are yet to become the most business savvy.
One of the first and most important steps when starting-up is to decide which legal entity would be most suitable for you, and your new business. Should you be a Sole Trader? Form a Partnership? Or register as a Limited Company? Hmmm… certainly something to think about!
Sole Trader
Often as easy to establish as deciding upon a trading name and heading off to work! As a Sole Trader, you will not need to complete long, often tedious, paperwork in order to get set-up. As the proprietor you will need to register as self-employed and enter self-assessment with HMRC. Filed annually, this will take into consideration the business’ financial performance for the year as well as account for any other taxable income sources in order to calculate the owner’s final tax liability.
It’s not all ‘green grass and roses’ forming your business under this legal entity however, as a Sole Trader, legally the business is an extension of the owner and is subject to unlimited liability. Therefore, you are personally liable for all business actions and could lose your personal assets.
Partnerships
Forming as a Partnership, it should go without saying that the business will consist of more than one individual registered as the business owner. Before establishing under this legal entity, a ‘Deed of Partnership’ will need to be drawn up outlining the roles of each partner, and their profit split.
A Partnership must file an annual Partnership tax return which will consist of the partnership’s income and expenditure, in order to calculate profit, and each partner’s share of that profit to be reported on their individual tax returns. Like a sole trader, a traditional Partnership will suffer from the same risk in terms of its unlimited liability.
Limited Company
A Limited Company can either take the form of a public limited, or a private limited company. Both are identical in terms of legal structure, and are owned and controlled by the company’s shareholders. The differences between them derive from the way their shares are issued. In a Public Limited Company shares are openly available for purchase by anyone on the stock market, whereas a Private Limited Company sells its shares to private investors only. While more complex to establish, with forms to complete with Companies House, generally higher fees to pay due to more reporting, and more legal obligations, it may seem more hassle than it’s worth to establish.
Legally a limited company is in itself a separate entity. This provides additional security for its directors against litigation or company debts. The company will be required to submit annual accounts, and file a Corporation Tax Return (CT600) reporting the company’s tax due on its profits generated.
Final Thoughts
Often, choosing which legal entity you formulate for your start-up can be a rushed, thoughtless process. However, the entity you formulate will have a profound impact on the way you conduct certain functions within your business, not to mention having an impact on how you will be governed by law, and the requirements in order to stay compliant with HMRC.
If you’re still in the dark regarding the legal entities or wish to discuss your options further, feel free to get in touch on 01452 812491 or email craig@pricedavis.co.uk; we’d be more than happy to shed some more light on the subject!