If you are new to running your own business you will have a great many things to consider at the outset.
Amongst the issue of obtaining funding, the trading name, the design of logos, the finding and setting up of premises and, most importantly, finding customers and securing sales, there are the perhaps less glamorous legal and accounting issues to consider. Most importantly is the ‘vehicle’ you choose by which to run your business.
There are three ways you can run your business as follows:
As a sole trader - everything is in your name, even if you use a trading name. It requires little or no formalities. You account for your net income (after expenses) to Her Majesty’s Revenue & Customs (“HMRC”) annually. Self-employment has the added benefit (as opposed to PAYE employment) that you can deduct expenses from your income before calculating your tax liability (subject to accountancy advice). However, as a sole trader, you are also personally responsible for any liability the business incurs, both in terms of the creditors who are owed money and any legal action taken against the business.
A formal or informal partnership with one or more people - you share the benefits and risks with your partners, the precise terms of which can be recorded in a partnership agreement. As a partner of an informal partnership, you (together with your partners) are jointly and severely liable for all partnership debts and other liabilities (in a similar way to being a sole trader). As a partner of a formal partnership you may wish to take limited liability (generally referred to as a limited liability partnership (“LLP”)) in which case the partnership must be registered at Companies House and can limit your personal liability in an identical way to a company (see below).
A limited liability company – conventionally a company is incorporated by shareholders. Each shareholder has his/her liability limited to the amount required to pay for their shares (often referred to as “share capital”). Directors run the company and shareholders only have input into the appointment of directors and in reviewing financial accounts. Quite often, particularly in small companies, the shareholders and directors are the same individuals (often referred to as an “owner-managed company” or a “quasi-partnership”) with the expectation that they will be allowed to be involved in the running of the company (although this is not always the case).
Read the FWJ booklet - The 8 most common mistakes when setting up a business
Read the FWJ booklet - The 8 most common mistakes when setting up a business
