E) Business Type and Ownership

This is not always as simple as it should be and it is vital to have the correct structure to start with. This will define the legal basis of your business. It can also have tax implications.

Sole trader
If you are planning to work (perhaps just initially) by yourself or with a small number of employees, it is often best to start in this way. All the business profits will be yours but you will also be liable for any business debts. Your assets (personal possessions) may be at risk of seizure if the business fails, and you end up owing money. 

Partnership
A partnership can be two or more people, and they share both the profits and liabilities of the business. The responsibility and financial risks are shared, but legally all the partners will be “jointly and severally liable” for any business debt incurred.  This means that you personally can be liable for debts run up by another partner. It is vital then to have a partnership agreement in place, so that all partners have equal rights. 

Simple money matters can cause huge problems, especially if the business seems to be profitable!  It is wise to cover all eventualities for you and your partners’ protection, peace of mind and for the long term business benefit. 

As circumstances and expectations change, it is worth asking certain questions such as:

• What happens to a partner’s share if they die?
• Who has the power to write cheques and authorise payments?
• How much holiday can you each take?
• What if a partner dies, is on long term sick or wants to leave?  

It is essential to have a formal partnership agreement drawn up so everyone is clear about company ground rules before you start. It should be discussed with your accountant, and then drawn up by your solicitor.  Don’t opt for any shortcuts on this issue!

Limited Liability Partnership
This shares many of the features of a normal partnership, but also offers reduced personal responsibility for business debts.

A partners’ liability is limited to the amount of money they have invested in the business, and to any personal guarantees they have given to raise finance. 

Forming a partnership of this nature is more expensive and complicated than a normal partnership, and brings additional costs. Your business’s financial information will be available to the public.

You may be treated as self-employed, but this is not always the case.  You should get specialist advice to assist you in your decision. Again, it is important to have a formal partnership agreement prepared before you start.

Limited company
If your business is a limited company, you will be an employee, and paid a salary.  The company will be liable for any debts, although it may be necessary to give personal guarantees to suppliers at the outset until you have become more established. You may not be able to make important decisions by yourself as you are accountable to others. 

You will also have to abide by the regulations governing companies, and need to have your accounts audited.  The costs are higher for starting and running a company, but there can be many benefits, and you will require advice from an accountant and solicitor, before making your decision.