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Starting up and Running a Business - what does it involve?
27 October 2009
Starting up and Running a Business – Options available and considerations
Starting up in business is an exciting but sometimes daunting prospect. For many new entrepreneurs there will be a number of things to consider before going to market with their product or service. There are numerous publications and texts on the subject. However, one of the most important decisions to make will be which structure should be used as a trading vehicle for the business.
There are a variety of forms of business organisation which a person or persons might choose to run their business and each have their own advantages and disadvantages, together with the level of complexity or regulation involved in setting them up. This article gives a brief overview of the more common types of business structures available to a new business start-up.
Types of business organisation
- Sole Trader
A sole trader is probably the most simple and straightforward of business structures. The sole trader is, as its name suggests, a one person business. As a sole trader you might have employees working for you, but you are the owner of the business and will be responsible for the day-to-day business making decisions. You will also own the assets (plant, machinery, stock etc) of the business.
You will be self-employed as a sole trader and will be responsible for paying income tax on any profits made by the business.
A sole trader has unlimited liability. This means that if the business does well, you, as the owner of the business, will reap all the rewards financial and commercial. However, the nature of unlimited liability also means that you will be solely responsible for the debts and losses of the business. If things go badly with the business you could face bankruptcy and potentially lose your home and other personal possessions as a result.
- Partnership
A partnership is, like a sole trader, a fairly flexible business structure in that there are no formalities required to set one up. The only condition is that there must be two or more persons going into business with a view to making a profit to form a partnership.
A partnership can be formed either orally or in writing. The owners of the business will be called ‘partners’ who will have a right to take part in the day-to-day management of the business. The assets of the business will be owned by the partnership (unless agreed otherwise) and, just like a sole trader, the partners will have unlimited liability.
Any profits of the business will be shared between the partners equally (unless agreed otherwise, for example, one partner might take a larger share of the profits if he has contributed more to the capital of the partnership or to reflect his level of seniority in the partnership). The partners will pay income tax on any profits made by the business. If trading does not go to plan and the business suffers a loss, the partners will be ‘jointly and severally’ liable for the partnership’s losses, with the risk that they could face bankruptcy and lose their personal possessions in just the same way as a sole trader.
- Private Limited Company
A company, unlike a partnership, has limited liability which is a fundamental point with this type of business structure. This means that the owner(s) are only liable for the amount of money they have contributed to the business. In contrast to a partnership and sole trader, a company also has a separate legal identity within law, which means that the company exists in its own right and separate from the person or persons who set the company up.
There is a separation of ownership and control when running a company. The owners of the company will be called ‘shareholders’ whilst the people who are responsible for the day-to-day decision making of the business are called ‘directors’. This distinction can become blurred however, in small family run companies where the shareholders and directors are often the same people.
The assets of the business will be owned by the company and any contracts entered into by the company will be in its name as opposed to the names of the person or persons running the business.
The disadvantage of running a company however, is the increase in formality required in forming a company compared with running a partnership or sole trader. Companies are also exposed to more regulation for example; yearly accounts and other forms such as annual returns have to be filed with the Registrar of Companies in
It is also important to note that the accounts of a company and other documents filed at Companies House are publicly available, whereas they are private documents for a partnership or sole trader.
- Limited Liability Partnership (‘LLP’)
An LLP is a form of hybrid business structure between a partnership and a limited company. It offers the protection of limited liability but the informality of a partnership.
What should I consider before setting up in business ?
When setting up in business one of the major considerations will be the risk involved and the potential scope to be shielded from that risk by limiting liability. It will also depend upon the costs involved in setting up the various different types of business structure.
However, by far the most significant factor in determining which business structure should be used to trade is the tax treatment of the different types of business structure. It is therefore highly recommended that before setting up in business one should speak to an accountant on the tax consequences of taking any particular route.
How can howell jones help you ?
howell jones’ business and commercial team are well versed in the various forms of business organisations and the key considerations which anyone thinking of starting a business should consider.
We can:
- Advise you on the different types of business organisation available and which one might be suitable for your business needs
- Guide you through the process of setting up in business and help you form a partnership, company or LLP
- Produce bespoke documentation for your business such as, partnership agreements, Memorandum and Articles of Association for companies and other constitutional documents
- Provide ongoing business advice as and when you require it to help your business grow and develop
If you are considering setting up a new business and want to discuss your options with us or you have another general company or commercial matter which you require expert advice, please contact a member of howell jones’ business and commercial team for a non-obligatory discussion.
