Limited company, LLP, sole trader or partnership?
Anyone starting a new business must choose whether to set it up as a sole trader, a partnership, a limited company or a limited liability partnership.
If only one person is involved, the choice is between being a sole trader and forming a limited company. If there are two or more participants, the business could be a partnership, a limited company or a limited liability partnership. The LLP is not commonly used, but for more details, click here.
For most people, the choice is between either setting up a limited company or not registering the business but running it as a sole trader (if only one person) or a partnership (two or more). There are other business structures such as PLCs, companies limited by guarantee andcommunity interest companies.
The pros and cons of setting up a company
The main factors are:
1. Limited Liability
For many people this is the deciding factor.
Starting a new business is often a risky venture. Usually
people are putting their savings at risk and may be
giving up their job to start their own business. It
is often important limit the risk knowing that if the
business fails they will not be liable beyond the capital
they have put into the company. They can protect their
house and other assets from being sold to pay the business
debts. Without limited liability, the risk of business
failure is being made bankrupt.
Note, however, that even with a limited company, it
may be necessary to take on some personal risk. If the
company borrows money from a bank, the bank will probably
want the directors to sign personal guarantees (i.e.
that they will pay b
2. Taxation
Registered companies are subject to a different tax
structure (corporation tax) from sole traders or partnerships.
The choice of structure can make a substantial difference
to the amount of tax paid on the same trading profits.
Consult your accountant for tax advice.
3. Formalities
There are more formalities in setting up and running
a limited company. These are not particularly complicated.
We would attend to all formalities on formation of the
business. After that, the company must register an annual
return and accounts with Companies House. In most cases
the accountant will do this. It is only a small additional
burden as accounts must in any case be supplied to Inland
Revenue whether it is a company, sole trader or partnership.
4. Privacy
The information at Companies House is on public file
where anybody can see it. This includes both accounts
(though for small companies this need be only a simplified
balance sheet) and details of the company's directors,
including share ownerships, etc. The availability of
this information can make it easier for the company
to get credit, once it is established, because a search
at Companies House can show that the company is stable
and growing.
5. The floating charge
A floating charge is a mortgage of (usually) all the
company's assets. It is a good way of using the business
assets as security for a loan. Only registered companies
can create floating charges. A sole trader or partnership
cannot do so.
6. Name protection
The only system for the registration of names is that
for registered companies. If the name is important to
the business, its owners may want it registered to prevent
anybody else registering it and to warn anyone searching
the index of companies to avoid similar names.
Even if the business is to be a sole trader or partnership,
a company can be registered in the same name and kept
dormant indefinitely. This will prevent the same name
being registered by anybody else and in practice, will
inhibit the registration of similar names.
7. Continuity
One of the advantages of a registered company is that,
being a separate legal entity, it keeps going indefinitely,
regardless of who owns or directs it. This can be an
advantage where ownership or control is going to change,
e.g. within a family.
8. Flexibility
The company structure, with the possibility of creating
different classes of shares and having directors who
may, but need not be, shareholders, allows much more
complex patterns to created. This can be used for tax
purposes to enable dividends to be paid to family members
who have lower income.
9. Appearance of size
Bigger businesses are nearly always companies and so
some small businesses are registered so as to create
an impression of size.
10. Outside investment
A company structure is ideal if outside investors are
to be involved. Investors like to have limited liability,
and the company structure allows different amounts and
classes of shares to be used. Investment in a partnership
is legally risky as someone who shares the profits of
a partnership may be regarded as a partner and may incur
unlimited liability for all the debts.
For further information contact us. We are here to help