One of the first considerations when setting up a new business is deciding the form it should take. There is no one perfect business vehicle to suit all ventures; there are various advantages and disadvantages to every option. It is therefore important to consider how each form will affect the venture in question when deciding which vehicle to adopt. This article outlines the key features of the most common business vehicles.
The most common forms of unincorporated businesses are sole traders and partnerships. A sole trader is an individual carrying on their business on their own behalf, and partnerships are two or more individuals running a business together. Other than registering with HMRC for tax purposes, these businesses require no formal steps to set up.
Unincorporated business owners personally own all profit generated by the business, and pay income tax as a self-employed people. This vehicle is very flexible, as the owners have the right to make all decisions facing the business and, unlike other forms of business, accounts do not have to be filed or made public.
However, unincorporated businesses do not have separate legal personalities, this means that while the business owner(s) personally own all the assets and profits of the business, they are also personally liable for all the debts and liabilities of the business. If the worst happens and the business fails, creditors are able to pursue the owners’ personal assets. It is also hard to attract equity investment for the business because of this liability issue.
Incorporated entities such as companies and limited liability partnerships are separate legal entities and give the owner limited liability in respect of the debts of the incorporated business. The owners’ liability will be limited to the initial investment they made. This limited liability comes at a price – an incorporated business must register with Companies House and comply with certain legislation, principally the Companies Act 2006 which includes making annual filings of accounts and statements of officers and shareholders. Incorporated businesses pay corporation tax on their profits and shareholders pay income tax on any dividends they receive.
Due to the limited liability nature of an incorporated business, most start-up businesses look to incorporate once they reach a certain size. Once incorporated it is easier to attract equity investment from third parties such as angel investors or venture capital funds.
If you wish to discuss any of the issues raised in this article or would like assistance with choosing the best vehicle for your start up business please contact Stephanie Taylor, the author of this article or Henry Maples, corporate associate, on 01872 226990.
The information provided in this article is for general information purposes only and does not constitute legal or other professional advice and cannot be relied upon as such. Any law quoted in this article is correct as at 23 November 2016. Appropriate legal advice should be sought for specific circumstances before any action is taken. Copyright © Murrell Associates Limited, November 2016.