Wednesday, 5 March 2008

Legal Structures for Businesses

Sorry that I have not posted anything for a while but I have been concentrating on building another online venture which you will soon hear about. Recently whilst talking to a lot of start-up businesses it became evident that deciding on the structure was an issue.

Here is some guidance and more will follow for social enterprises in another post.

Legal Structure Guide

Before starting a business one of the first steps is to decide on the type of business structure, will you be a sole trader, partnership, limited company etc.

Sole Trader
Becoming a sole trader is easiest way to set up in business
Setting up a business as a sole trader is quick and easy and involves virtually none of the form-filling associated with forming and running a limited company. Sole traders make their all of their own business decisions and don’t have to answer to anyone else.
However, the downside of this is that sole traders are personally responsible for any losses the business makes.
If fact many owners are unaware that your own possessions — including your home — could be at risk if you can’t pay your debts. And you may also find it more difficult to get finance to fund your business.
Once you’re operational, you must keep a record of the business’s income and outgoings.
Despite the name, you don’t have to be completely on your own; a sole trader can take on employees.
Although sole traders are often taxed as self-employed, this isn’t automatically the case even though you’ll be working for yourself. If you are self-employed, you must register with HM Revenue & Customs within three months of starting up

Actions.

It’s a good idea to seek help from a business adviser or solicitor when deciding the best legal form for your business

If you are self-employed, you must register with HM Revenue & Customs. Contact 08459 15 45 15;
www.hmrc.gov.uk/startingup


Partnership
Forming a partnership allows two or more people to establish a business together, sharing profits, management burdens — and risks.
A partnership will allow you to share the responsibility of managing a business. And joining forces with other people may mean you often have more money to invest in the business.
Partners also share personal responsibility for business debts.
They put their own possessions on the line, including their homes, if things go wrong. If one partner can’t pay their share of any debts, the other partners become jointly responsible for it.
Remember that a partner could make business decisions or enter into binding contracts without the consent of other partners. It’s therefore vital to draw up a partnership agreement, setting out how the partnership will be run and how any proceeds will be split, (it’s best to use a solicitor for this). This will help to prevent disputes.
Partners are often taxed as self-employed but this isn’t always the case. If you are self-employed, you must register with HM Revenue & Customs within three months of starting up (see below).

Actions

It’s a good idea to ask a solicitor to help you set up a partnership agreement

If you are self-employed, you must register with HM Revenue & Customs. Contact 08459 15 45 15;
www.hmrc.gov.uk/startingup

Limited liability partnership
A limited liability partnership, or LLP, is a newer form of business and shares many of the features of a normal partnership, but it also offers reduced personal responsibility for business debts.
Members of an LLP are protected from personal responsibility for business debts. Their liability is limited to the amount of money they have invested in the business and to any personal guarantees they have given to raise finance.
As with a traditional partnership, you share management responsibilities and potentially have more money to invest in the business.

But forming an LLP is more expensive and complicated than setting up a partnership. You have to send a registration document (Form LLP2) to Companies House and pay a fee (currently £20, or £50 for same-day service).

A solicitor or company formation agent can help you set up an LLP. An LLP also brings a number of extra running costs. For example, you have to make financial information about your business publicly available by sending a copy of its annual accounts to Companies House. You must also submit an annual return giving key details of the LLP and its members.

Also LLP’s have to have their accounts audited. But those with a turnover of less than £5.6m and a balance sheet total of less than £2.8m are normally exempt.
Again it’s essential that you have a partnership agreement drawn up setting out how the LLP will be run and how profits will be shared.
Members of limited liability partnerships are often taxed as self-employed but this isn’t always the case.

One restriction is that you can’t form an LLP if your business will be a charity or not for-profit organisation.

If you are self-employed, you must register with HM Revenue & Customs within three months of starting up.

Action

It’s vital that you ask a solicitor to help you draw up a partnership agreement

Again if you are self-employed, you must register with HM Revenue & Customs.
Contact 08459 15 45 15;
www.hmrc.gov.uk/startingup

You can get Form LLP2 from Companies House. Contact 0870 33 33 636;
www.companieshouse.gov.uk

For more information read:
Limited Liability Partnerships— Formation and Names (GBLLP1).
Contact 0870 33 33 636;
www.companieshouse.gov.uk

Check for changes in the law as regulations, figures and sums of money may have changed since publication.

Limited company
A limited company can offer reduced responsibility for business debts — but it brings a range of extra legal duties too.
Private companies are limited by shares that generally protect the individual from personal responsibility for business debts. But your personal risk will be restricted to how much you invest in the business and any financial guarantees you have given in order to obtain financing.

However, if the company fails and you have not carried out your duties as a company director, you could be liable to pay the company’s debts or be disqualified from acting as a director in another company. You can raise money for the business by allowing individuals or other businesses to subscribe for shares in the company.

You can also give employees the opportunity to own a share in the business.
Alternatively, the company may seek loans from banks or other lenders, although lenders will usually want personal guarantees for the loan from you.
Setting up a limited company may also bring marketing advantages if it adds to the perceived credibility of your business, also organisations offering contracts will often only contract with Limited companies.

Although Limited companies pay corporation tax on their profits, you as a director will also be taxed as an employee of the company in the same way as anyone else who works for you.

There are extra administrative costs associated with setting up a limited company. The company must submit annual accounts and tax returns to HM Revenue & Customs — on top of any returns you must send on your own behalf.
A set of accounts also has to be sent to Companies House, this will make financial information about your business publicly available. You must also send Companies House annual returns giving certain details on the company and its directors and shareholders.
Some Limited companies must also have their accounts audited. But most small companies with a turnover of less than £5.6m and a balance sheet total of less than £2.8m are exempt.

To set up a limited company, you will need to create a memorandum of association and articles of association, which have to cover issues such as who will be running your business, what it will do and where it will be based. These documents, along with the standard registration documents (Forms 10 and 12), must be forwarded to Companies House before you can start trading.
(Currently the registration process costs £20, or £50 for a same-day service).

Company formation agents can handle the process for you, registering your company electronically with Companies House (for a fee). You can register a company yourself, but it’s worth taking advice from a solicitor, an accountant or a formation agent to make sure you get it right first time. The introduction of electronic incorporation allows formation agents and other intermediaries to register a company with Companies House very quickly and at a competitive cost. contact me for a recommended low cost on line formation service

This guide covers only covers regulations, it’s also recommended that you also obtain general business advice


For more information about how simple techniques could help your business e-mail me today!

Alan Briggs

Dynamic Business Strategies Ltd
Tel: 07917 446068

E-Mail: info@dynamicbusinessstrategies.co.uk
Website: www.dynamicbusinessstrategies.co.uk

2 comments:

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Michael said...

There are lots of complex issues to keep in mind when making a decision. No matter which type of business structure you are likely to choose, it is best to consult a lawyer for advice on which structure with propose your company the best tax situation while still allowing protection for your assets

Regards
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