The importance of choosing the right business format…
Even though your business might be a part time business or a home business it’s important to set it up properly. Here are the main types of business format that might be suitable for your business.
A sole trader
A sole trader is the simplest type of business and consists of one person trading on his or her own account. A sole trader has complete control of their business, and no other person has a say in what they do. They also keep the profits for themselves. They do, however, bear all the risk and are personally liable for any losses they might incur.
A sole trader enterprise is attractive because it costs virtually nothing to set up and is simple to operate.
You don’t need a licence for a sole trader business and you don’t need to register it in any way
A partnership consists of two or more people trading together. Partners working in a business have an equal say in decision making. They also share any losses equally, unless they are nominated as limited partners who have limited liability but who cannot be involved in the management of the business.
A partnership should always have a partnership agreement. Any solicitor can draw up such an agreement, although it is perfectly possible to draw up your own partnership agreement. It should cover:
- Whether decisions may be made separately or jointly
- What each partner is entitled to in terms of pay
- What procedure should be followed if any partners wish to leave
A private limited company
You might want to consider forming a private limited company. A company is a ‘person’ in its own right. It can own property in its own name. It can sue or be sued. Most importantly, in the event of any loss or bankruptcy, the shareholders in a limited company are only liable for a limited amount of any debts (normally a token £100).
So, forming a limited liability company is a very good way of protecting yourself from financial loss in the unlikely event that anything goes wrong. A company is also responsible for its own tax and may benefit from certain tax advantages so that you could pay less tax overall by running your business through a company.
Companies need to be registered with Companies House and can be formed yourself or through an accountant or a company formation agent. Limited companies must prepare annual accounts and file them with Companies House. Your company will also have to pay Corporation Tax on its profits.