Starting a business – common legal structures
One of the very first issues that come with starting a company is its legal structure. This choice can be crucial for the new businesses because it will determine some of the most significant matters, such as the personal responsibilities of the owners, how the cash flow will be divided and the types of taxes that will have to be paid.
1. Sole Trader
- A sole trader is one of the most start up-friendly legal structures as there is no need to register the business with the Companies House. Sole traders are the individuals running their own businesses. As a consequence, all the business revenue after tax will go to them, but at the same time the owner will be personally responsible for any debt.
- That means that the personal assets of the sole trader are available for the creditors’ claims in the event of bankruptcy.
- Sole traders are legally recognised as self-employed and pay income tax on their profits.
- Registering as a sole trader does not prevent an owner from hiring other employees.
In a regular partnership the partners are equally liable for the debt of the business and share the responsibilities of running it. An agreement regarding the allocation of profits and ownership between the partners will be a requirement. Partners will be registered as self-employed and, similarly to the sole trader, pay income tax on their part in the profit.
In the limited partnerships there are ‘general’ and ‘limited’ partners with different levels of liability. A limited partner will only be responsible for the debts of the partnership to the extent of his contribution, but his rights are restricted when it comes to the business decisions. A general partner is personally responsible for the debts of the partnership, but is also a person who fully controls the business.
Limited Liability Partnership (LLP)
Limited liability partnership offers protection of a limited company with the flexibility of a partnership. The partners in a limited liability partnership are exposed to the losses of the partnership only to the extent of their investment in the business, which means that only the assets of the partnership are available for the claims of the creditors. Tax regime is similar to a regular partnership – each partner will registered as self-employed and pay income tax on their share of profit. An LLP must be registered with the Companies House.
3. Limited Company
- In a limited company the owners is not personally liable – the company has a separate legal personality and it bears the full responsibility for its actions. The profits will belong to the company and then can be distributed among the shareholders. Limited companies are subject to Corporation tax which can be more favourable than Income tax.
- One of the most popular choices is a private limited company (Ltd) – the liability in this type of structure is limited to the share value. In addition to the shareholders, a limited company have to have one or several directors, who are responsible for managing the company. Shareholder and a director might be the same person.
It is advisable to seek professional legal advice when setting up a business in order to clearly understand your legal responsibilities and protect your business from the possible liabilities that might arise.
Come and see on of our expert commercial solicitors during our Small Business Advice Clinic held every Tuesday between 9 am and 10 am in our Manchester office – booking details can be accessed form our events page.
Should you need urgent advise on setting up a business or commercial contracts contact our specialist corporate solicitors or commercial contracts solicitors solicitors in Manchester on 0161 820 8888 and solicitors in London on 0208 889 8888 for immediate assistance.
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