What is the Best Legal Status for my Business?

Posted: 1st December 2016


By: Sandra Garlick MBE

What is the Best Legal Status for my Business?

So, you’ve had the great idea and now you actually want to start a business of your own.

The problem is: What next? Well there is a very long list of things that need to be carried out before you start trading, but one crucial decision you need to make is about the legal structure your business should take.

Even if you’re just working from the sofa in your lounge, your business needs to have some kind of legal form. There are 4 main choices:

  • Sole trader
  • Limited company
  • Partnership
  • Limited liability partnership

Sole trader/Partnership – the easiest way to go?

Certainly the quickest and simplest way is to start operating as a sole trader. You don’t need to do anything particular apart from notifying HMRC that you have started trading and that you will be taxed as self employed. You only need to keep basic accounts and you can still employ people, should you wish to do so.

Of course with a partnership you have the upside of someone else sharing the risks and responsibilities with you. The downside to that is, if your partner runs up any debts, you will be liable too and if he/she signs up to a long term or bad contract, you will be bound by it.  In the case of a partnership it is vital to have a partnership agreement.

It is also important to remember that operating as a sole trader, or as part of a partnership, means that you are personally liable for all of the debts of your business and this can include your home being at risk.  It is especially important to remember that each partner in a partnership is jointly and severally liable for the debts of the business.  If your partner absconds, you could be left with all the liabilities.

What about a limited company?

Many people think that setting up a limited company is the answer to all of their prayers – corporation tax is payable at a lower rate and having a limited company means that your personal liability is limited. Rightly or wrongly there also remains a perception that a limited company is more heavyweight than a sole trader.

This isn’t always the case in practice though.  If you want to borrow money, your bank will very often want a personal guarantee anyway.  Plus, if you were to act in such a way that your behaviour was judged to be wrongful, fraudulent or without due care, then you would still be personally liable for any losses.

Setting up a limited company is relatively easy and you can do this yourself online through the necessary process with Companies House. There is a very small fee to pay. Once your company has been set up, there are ongoing requirements such as filing an annual return and accounts, notifying any changes of directors and so on. However, a company does also give you some extra flexibility – for example you can sell shares to outside parties or use them to incentivise employees. Registering your company name can also be a useful first step in trying to protect that all important brand!

Or a limited liability partnership?

Limited liability partnerships are pretty expensive and complicated to establish. They do though have the advantage of (as their name suggests) allowing you to limit your liability in the way that a standard partnership doesn’t.

Limited liability partnerships have been very popular for professional practices such as Solicitors and other professional advisers.

What next?

It’s really important to give due consideration to your trading status.  It is far easier to move from trading as a sole trader to a limited company.  Trying to do things the other way is a lot more complicated.

There is lots of useful information available from HMRC and Companies House

You don’t have to seek legal advice but you should seek accounting and taxation advice before deciding, as of course financial issues may have a major influence on what course you decide to take.

Sandra Garlick is a former business and employment law solicitor and is now a business growth consultant, mentor, trainer and public speaker. Speak to Sandra about Start Up Support and Business Mentoring. She  frequently speaks about Start Up and other business growth topics.

Follow @SandraGarlick @SGBusConsulting