Setting up a Business

When a new business venture is established, whether as a start-up or a new enterprise by an existing business, a decision has to be made on what legal structure the business will have. The main choices are:

  • Sole trader
  • Partnership
  • Limited company
  • Limited Liability Partnership (LLP)

Each of these has advantages and disadvantages, largely in terms of the tax treatment and general liabilities of the business and its owners, and the cost of administration. While there are exceptions in specific cases, the main differences are set out in below.

Sole Trader

  • A sole trader must be a single individual. A second person joining in the business will automatically create a partnership
  • The business has no separate legal identity of its own
  • Liability for the individual is unlimited and he is personally responsible for all debts, contracts and liabilities
  • The individual is personally responsible for his own taxes
  • Any property or assets in the business are owned by the individual personally
  • There is no requirement to file any information publicly

Partnership

  • A partnership consists of two or more legal entities (which may be individuals or companies)
  • The partnership has no separate legal identity of its own
  • Liability for the partners is unlimited and they are jointly responsible for all debts, contracts and liabilities of the business
  • The partnership must file a tax return, but the partners are personally responsible for their own taxes
  • Any property or assets in the business are owned by one or more of the partners personally
  • Unless the partners agree otherwise, all profits and losses are shared equally by all the partners
  • There is no requirement to file any information publicly
  • New partners may join and existing partners may leave, depending on any terms agreed between the partners
  • If the partnership falls to a single person, then he will become a sole trader

Limited Company

  • A company must have at least one shareholder (which may be an individual or company),
  • The company has its own legal identity, separate from the shareholders
  • Liability for the shareholders is generally limited to the nominal value of their shares. The company itself, and not its shareholders, is responsible for all debts, contracts and liabilities of the business
  • The company must file a tax return and pay taxes.
  • The company generally owns any property or assets in the business
  • The profit of the business belongs to the company. It may be distributed to the shareholders by way of dividend. Shareholders may also be employees of the company
  • Information on the shareholders and directors of the company must be filed annually, as must annual accounts. This information is available to the public
  • New investors may come into the business by the issue to them of new shares in the company or the sale by existing shareholders of some of their shares
  • The company makes its own decisions (through its directors), but the shareholders may agree between themselves how the relations between them is to be governed. Click here for more information on shareholders agreements.

Limited Liability Partnership (LLP)

  • An LLP consists of two or more legal entities (which may be individuals or companies), known as members
  • The LLP has its own legal identity, separate from its members
  • Liability for the members is generally limited to the capital they have invested in the business. The LLP itself, and not its members, is responsible for all debts, contracts and liabilities of the business
  • The LLP must file a tax return, but generally the members are personally responsible for their own taxes
  • The LLP may own any property or assets in the business
  • Unless the members agree otherwise, all profits and losses are shared equally by all the members
  • Information on the members of the LLP must be filed annually, as must annual accounts. This information is available to the public
  • New members may be admitted or old members leave depending on any terms agreed between the partners
  • If the membership falls to one, that member will cease to have limited liability.
  • The members may agree rules on how the LLP is to be run.

The next steps

Once a business structure has been chosen, there are numerous other requirements which a new business will have to address, including:

How can we help?

We have a wealth of experience in assisting new businesses and can offer advice on the best structure to use in the particular circumstances. We can also help with the formalities of setting up companies and LLPs and with partnership, LLP and shareholders agreements. We are also very experienced in helping foreign businesses establish a presence in the UK.

Once the formalities of setting up a business are out of the way, we can advise on property and employment matters and all kinds of commercial agreements. If you have any questions or are looking for information on anything relating to starting up a new business, or if you are thinking of changing the legal structure of an existing business, or any other business law matter please contact Charmaine Dudman