2017 has all but come to a close which means it’s time to bust out your best notepad and pen and start drafting those New Year resolutions. If the recent series of The Apprentice on the BBC has inspired you, perhaps 2018 is the right time to bring your entrepreneurial ideas to life? If that’s a yes, then it’s time to think about how to make your business plans a reality.
So where do you start? One of the primary considerations of venturing out into the business world is to consider what structure best suits your business needs.
Going it alone
For lots of individuals, setting up as a sole trader is the most practical and simplest way of getting your business started. Becoming a sole trader is very straightforward, avoids the rigorous formalities associated with other forms of businesses and has no fees to register. Operating as a sole trader also provides the freedom to run the business as the owner deems appropriate and all profits will belong to them.
So far so good? The ease of becoming a sole trader is why it is an extremely popular business medium but it is not without its disadvantages. Despite not having much in the way of red tape for new businesses, you must note that your profits will be taxed and you will need to register for self-assessment with HMRC.
Furthermore, whilst all profits will belong to the owner, so do the bills! The sole trader is solely responsible for all business debts that it incurs which can cause problems for start-ups struggling to get off the ground.
Working in Partnership
Sometimes there are more people in the picture meaning becoming a sole trader is not the right route for your business. If there are others at the table, then perhaps a Partnership is a better fit. They are easy to form and provide a vast amount of freedom for the owners to decide how to run the partnership.
Partnerships are legally formed when two or more persons carry on a business with a view to a profit. This means that an oral agreement between you and a business partner to sell products to make money and share the proceeds, the law will deem that a partnership has been created under the Partnership Act 1890.
The lack of a written agreement can lead to uncertainty for Partnerships so if you are thinking of starting a new partnership the best method is to meet and discuss how the partnership will take effect and produce a written agreement to that effect. Thinking about all possibilities when drafting a Partnership Agreement can provide clarity on financial contributions, ownership percentages and decision-making. Another key aspect to discuss is the allocation of risk for debts and liabilities as, like Sole Traders, there is unlimited liability for business debts in Partnerships, which is key to bear in mind when selecting the best business medium for you.
Incorporating a business
Whilst there are various ways to incorporate a business, the most popular forms are the private limited company and limited liability partnerships. In each case, whilst there is protection for the owners, there are a great deal more formalities to comply with to get your business up and running.
Private limited companies can be limited by shares or by guarantee and are governed by the Companies Act 2006. Unlike sole traders, owners have constraints on how they operate and make decisions, and profits are earned by the company not the owners directly. Private limited companies may also have separate directors that manage the day-to-day running of the company, adding further layers of formality to the business.
However, for Sole Traders and Partnerships there is one key downside in the fact that the owners have no personal protection for the debts of the business. This downside is avoided when incorporating a business as a private limited company as the owners are distinguished from the company which will have a ‘separate legal personality’.
Limited Liability Partnerships are governed by the Limited Liability Partnerships Act 2000 and act as a cross between a partnership and a limited company. It carries protection for its shareholders in the same way as limited companies but also provides a degree of flexibility that is more associated with partnerships. However, members of the LLP must individually register with HMRC for tax purposes and information, including financial information, must be publicly available.
At Hybrid we can help explore all possibilities with you as you pursue your business goals in 2018. Give Hybrid a call to discuss how to take your business to the next level.