Going out on your own as a start-up business or a new business venture can be daunting. There are many things to think about, the first of which is usually what business structure is going to be the best fit for you. There are many different options to consider, the most common being that of the sole trader, the partnership, and the limited company.
Here, Greenaway Scott take a look at these three different types of business structure, providing an overview of the advantages and disadvantages of each to help you decide which route is best for you and your business.
As a sole trader, you are afforded the most flexibility of the business structures. The administrative requirements are minimal. The main advantage of this structure is that there are no formal registration requirements for you to be able to start trading. From a tax perspective, as a sole trader you would be taxed personally on any profits you make through income tax. You as owner of the business are free to make decisions as you see fit, without having to adopt specific mechanisms to be able to make decisions, which would for example be required if you were to set up as a limited liability company.
However, the pitfall of operating as a sole trader is the concept of unlimited liability. As a sole trader, creditors can personally pursue your assets beyond your investment in your business in the event that your business owes somebody else money. This means that, should the worst happen, your personal assets, including your house or any savings, could be at risk.
A partnership arises when two or more people work together with a view to making a profit. This means that you could be in a partnership without realising it if you and a colleague have gone into business together.
A partnership, like a sole trader is a flexible type of business structure with less administrative requirements than that of a limited liability company. Much like a sole trader, a partner in a partnership will pay tax on any profits through income tax.
However, if a partnership has arisen, terms are implied into the partnership under the Partnership Act which could be prejudicial to you if you are not aware of them. Examples of such terms include that profits and losses are to be shared equally. This could be an appropriate position for you or it may not be. In any case, it is important with partnerships to have a partnership agreement in place, which sets out the specific agreement between the parties and excludes or varies any prejudicial terms under the Partnership Act.
A partner in a partnership also has unlimited liability like the sole trader so a partners personal assets could be at risk should the company enter into default with any of its creditors.
A limited liability company is markedly different from that of a sole trader or partnership in that the company itself is a separate legal person of its own. This means that it pays its own tax i.e. corporation tax.
The benefit of structuring your business in this way is the concept of limited liability. This means that in the event that a creditor was pursuing your company for money, only your investment in the company would be used to repay any debts and your personal assets could not be pursued due to the company’s separate legal personality.
However, a limited company affords less flexibility than operating as a sole trader. Once a business is incorporated the person(s) owning and/or running the business have duties under the Companies Act and must comply with this legislation to make decisions validly. Company’s also have greater administrative demands in having to file documents such an annual returns or confirmation statements in accordance with the same legislation.
It is important to understand the above trade-offs between types of business structure to be able to use the right structure for your circumstances to start utilising your idea. Awareness of the other available structures is also important as these may become more relevant as your business grows and your objectives change.
If you want to discuss how best to structure your business including some options which have not been detailed in the above article, please feel free to get in touch with someone from our corporate team who would be happy to assist you. Please contact us at [email protected] or call us on 029 2009 5500 to speak to one of our team.
The information contained in this article is for information purposes only and is not intended to constitute legal advice.