Choosing the type of business you will operate can have wide ranging legal and financial implications. Here we’ll discuss the different options available to you and highlight the key areas to consider.
Where do I start?
Deciding to start a business is a major step so it’s important that you consider some key questions at the outset.
First of all, you’ll need to think about whether you want to go into business by yourself or bring someone else along with you as a partner
You’ll also need to consider how easy it is going to be to operate the business from a financial and legal point of view
Finally, you’ll want to consider what may happen if things don’t quite work out as planned.
How do I set up on my own?
When you set up on your own you’re known as a ‘sole trader’ business.
This is quick and easy to set up, simply tell HMRC that you have become self-employed by registering with GOV.UK or giving them a call on 0300 200 3300.
You’ll need to keep records and pay Income Tax and National Insurance contributions through Self-Assessment.
As a self-employed person you are responsible for any debts the business has so you will need to ensure that you manage the finances carefully. As a sole trader you can employ staff, for example you’ve started as a painter and decorator and can’t do all the work yourself.
How can I set up with someone else?
It may be that you want to start the business with more money or have the chance to work with someone with skills that compliment your own. Forming a partnership can be a worthwhile option. An ‘ordinary partnership’ exists when two or more partners form a business. You’re jointly responsible for the debt of your partnership so having a clear agreement and controls in place is essential. Again, you must register with HMRC.
If you’re concerned about your responsibility for any debts the business may run up then there are steps you can take. Make sure that the business does not over stretch itself and let debt get out of control but if you’re still not sure options are available.
Some types of business can give you ‘limited liability’. This means that you only stand to lose the amount you have invested. Whilst this sounds appealing, you should remember that any person giving you a loan is likely to want a personal guarantee that the loan will be repaid from you as well.
Forming a Limited Liability Partnership (LLP) is an option to consider as your liability is limited to the value of your investment. You’ll need to make a Partnership Agreement and register your LLP with Companies House. You can do this directly or use an agent to help if you prefer. We’d strongly suggest that you take advice on this if you are unsure as there are more formalities with this type of partnership. Agents’ fees may also vary widely.
What can I do if the business grows?
Your business may form as, or convert to, a Private Limited Company (Ltd). Your Ltd company is a separate legal entity and must have at least one shareholder and one director. Shareholders can only lose up to the value of the shares they have agreed to buy. Directors run the company and are its employees.
You’ll need to register your Ltd with Companies House either directly or by using an agent if you prefer. You’ll also need to register for Corporation Tax with HMRC. We’d strongly suggest that you take professional advice as there are many legal formalities with this type of business.