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How to choose the right Business Structure
Part 2 of the ‘Starting a business’ series
When starting out in business there are various different ways you can choose to structure your business. The most likely Business Structure that you may opt for is either a sole trader, a partnership or a company. The decision really depends upon your circumstances and what is right for your business. There are pros and cons to each.
Business Structure: Sole Trader
Registering as a sole trader is straightforward. It is a low cost option and you can easily register with HMRC. However, the downside is that the law makes no distinction between you and your business. This means that the debts of your business are your personal liability, so your creditors can come after your personal assets (your house, your car and your savings, etc.).
Business Structure: Partnership
A partnership may be an attractive option, provided you know and trust your business partner well. You can share the liabilities of the business but also the profits. But again like a sole trader you are personally liable for the debts of the business. An alternative is a limited liability partnership (LLP) which protects your personal assets from the creditors of the business. However, LLPs come with quite a lot of administrative burdens, just like a limited company.
Business Structure: Limited Company
A limited company gives you protection from personal liability, but still not necessarily 100%. Lenders and landlords will often seek personal guarantees from directors to secure business debts. There is also a lot more administrative and regulatory burdens in running a company. It is important to keep on top of record keeping, for example company filings and registers. This is not only to adhere to your statutory duties (online filing makes this easier) but also because if you decide to sell your business any buyer will expect well-organised documents and evidence that your business has been run properly.
It is key to remember that your business is like a living being which can and will change over time. Therefore, you might start out as a sole trader but then decide to incorporate as a limited company or enter into partnership as your business grows.
If you decide to change your business structure or take on one or more new partners or shareholders then you need a written partnership agreement or a shareholders agreement as applicable. These documents govern your relationship with your fellow business partners and help protect you and your business from potential risks and disputes down the line.
These documents set out the rules for managing your business relationships going forward, a little bit like a pre-nuptial agreement. They can set out things like how profits will be shared; what happens if one of you wants to leave; what happens in the event of dispute, or on death; and the procedures for major business decisions. Without such an agreement you can end up in dispute or relying on old statutes such as the Partnership Act 1890. These documents can help protect your business from disputes which can in turn damage the goodwill of your business and spell disaster for your reputation and hard work.
Written by Shelley Bonney, Corporate Solicitor at WSP Solicitors
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