What legal form should the business take?
One of the first things to decide when setting up a new business is the legal form that business should take. There are essentially four basic forms that a business can operate through. These are sole trader, partnership, limited liability partnership and limited company.
Each structure has implications in relationship to the ownership of assets, liability and taxation. It is important that these issues are considered in conjunction with your own particular circumstances in order to decide which structure is most suitable for your business.
The forms of business structure are considered in more detail in the business section of the website. Below is a brief summary of each type of business structure and its characteristics.
The most basic form of business structure is that of a sole trader, whereby an individual simply commences carrying on a business in his or her own name. There are no legal formalities to be complied with and, as such, it can be a very cost-effective format. All income generated by the business will be taxed as the individual's income and the individual will also bear personal liability for the business's debts and contracts. This form is not suitable where more than one person is involved in the ownership of the business.
Where two or more people are involved in setting up a business a partnership is automatically formed. It is advisable that a formal partnership agreement is drafted to regulate the relationship between the various partners (e.g. how much money each partner puts in and how much each can take out, which partners will be responsible for doing what and what happens if the partners fall out.) The partnership will be taxed on the basis of each partner receiving a slice of the profits (as determined by the partnership agreement) and paying personal income tax on that sum. Each partner will be responsible for the actions of every other partner and will be personally liable for all debts incurred by the business and any other obligations entered into by it.
This is the same as a straightforward partnership with the exception that the partnership agreement governing it and its annual accounts must be open for inspection by the public. This is done by lodging the documents at Companies House. In return for this openness the partnership can limit the liability of each individual partner to a set amount.
A limited company has its own legal identity and is owned by its shareholders. The running of the business by the company is governed by its Board of Directors and all income generated by the company is subject to corporation tax as opposed to income tax. It is the company itself that is responsible for any liabilities it incurs and the only thing its shareholders have to lose are their shares.
For more information please contact Simon Morris.
Each structure has implications in relationship to the ownership of assets, liability and taxation. It is important that these issues are considered in conjunction with your own particular circumstances in order to decide which structure is most suitable for your business.
The forms of business structure are considered in more detail in the business section of the website. Below is a brief summary of each type of business structure and its characteristics.
Sole trader
The most basic form of business structure is that of a sole trader, whereby an individual simply commences carrying on a business in his or her own name. There are no legal formalities to be complied with and, as such, it can be a very cost-effective format. All income generated by the business will be taxed as the individual's income and the individual will also bear personal liability for the business's debts and contracts. This form is not suitable where more than one person is involved in the ownership of the business.
Partnership
Where two or more people are involved in setting up a business a partnership is automatically formed. It is advisable that a formal partnership agreement is drafted to regulate the relationship between the various partners (e.g. how much money each partner puts in and how much each can take out, which partners will be responsible for doing what and what happens if the partners fall out.) The partnership will be taxed on the basis of each partner receiving a slice of the profits (as determined by the partnership agreement) and paying personal income tax on that sum. Each partner will be responsible for the actions of every other partner and will be personally liable for all debts incurred by the business and any other obligations entered into by it.
Limited liability partnership
This is the same as a straightforward partnership with the exception that the partnership agreement governing it and its annual accounts must be open for inspection by the public. This is done by lodging the documents at Companies House. In return for this openness the partnership can limit the liability of each individual partner to a set amount.
Limited company
A limited company has its own legal identity and is owned by its shareholders. The running of the business by the company is governed by its Board of Directors and all income generated by the company is subject to corporation tax as opposed to income tax. It is the company itself that is responsible for any liabilities it incurs and the only thing its shareholders have to lose are their shares.
For more information please contact Simon Morris.
