Full width home advertisement

Wholesale Jewelry / Custom Jewelry

Post Page Advertisement [Top]

A question that many people ask of themselves, but in the business context it extends well beyond one’s self esteem. How you arrange your trading affairs has profound implications for your financial future and it pays to get it right at the outset.

Essentially there are four modes of trading for a small business:-

1. Sole Trader/Proprietor

2. Partnership

3. Limited Company

4. Limited Liability Partnership

Sole Trader

A sole trader is somebody who conducts a business or trade and has made no arrangements to be any of the other three types of business format. There is no mandatory central registry of sole traders so your affairs are entirely private. All the profits are counted as your personal taxable income, the business assets will be your personal property and the amount of tax payable by you is the same whether or not you draw the money out of the business. You will be personally liable for the debts of the business or any other legal claims that may arise, such as product liability.

Partnership

A partnership is where two or more people agree to trade as a unit and are essentially “sole traders” who share the profits and losses. There is no mandatory central registry of partnership businesses so your affairs are entirely private. It is imperative for the partners to draw up a partnership agreement that governs the conduct between them that deals with matters such as sharing profits, responsibilities and terminating the arrangement. Each partner may find themselves personally liable for the actions of the other partner.

Limited Company

A limited company is a legal creation which is established in law and governed by the Companies Acts. The process of setting up a limited company is usually referred as company formation, setting up a limited company, registering a limited company or incorporating a limited company. Limited companies are registered at Companies House where a live database of all UK limited companies is kept and they are a distinct and separate entity from their owners and the people who run it. It has its own status for taxation, financial and general legal purposes. A limited company is like another person and is separate from its owners.
The directors run a limited company and the shareholders (members) own it. The director may also be a shareholder and will always be answerable to the other shareholders if there are any, and is legally bound to act in their best interests. A limited company only requires one member and one director, who can be the same person. The company director is responsible for running the business and is the person who bears responsibility for the actions of the company. The cost of a company formation itself is typically between £50 and £100 with extra costs incurred should you visit an accountant for tax or business advice.

Once your company has been registered you can trade with it. An off the shelf company, also referred to as a readymade company, will be pre-registered and you can use it to trade immediately. Your company can remain a dormant company (non trading) for as long as you wish. The running costs are basically the same as any type of business but  it may cost extra to arrange your own wages and prepare year end accounts and there is annual statutory fee of £15 – £30 for keeping the company on the register at Companies House. There are penalties for the late delivery of documents at Companies House.

It is not a legal requirement for a limited company to have an accountant, although it is usually advisable to seek the services of a suitably qualified accountant, as they will prevent you from making costly errors, prepare your year end statutory accounts and almost certainly reduce your tax charges. Companies will only need a mandatory audit once their turnover (sales) or balance sheet value is “in the millions” and your accountant can advise you of the exact figures, which change periodically.
The crucial difference between a limited company and a sole trader / partnership is the protection from personal liability for business debts. Unless you sign a personal guarantee or trade fraudulently a limited company is “limited” in the sense that its owners are not liable for its debts. Some people see a limited company as an insurance policy, especially for a new business or a high risk business. Many people lose their savings and other assets because they started up not “being limited”. You need to assess the risk of your situation and balance the risks against the costs. Always try to take some specialist advice at this stage.

You will require a registered office, which is an official address for the limited company, where legal documents and letters from Companies House can be served. It does not have to be the trading address, and it can be your home, your accountant’s office or at any address that suits you. It is crucial that the address used is reliable in dealing with incoming post. The director will require a “service address”, which is an official address where legal documents and letters from Companies House can be served on the director. It does not have to be the trading address, and it can be your home, your accountant’s office or at any address that suits you. It is crucial that the address used is reliable in dealing with incoming post.

It is worth bearing in mind that unlike a sole trader, who can draw money out of the business without incurring a tax charge, a company director would have to be paid under PAYE (including benefits such as a car or healthcare) and the shareholders are rewarded by means of a dividend, subject to the regulations.

Below is a summary of the pros and cons that are typically cited when considering forming a limited company:
Advantages of a Limited Company

You can give a share of the business to others e.g family or friends
It may be easier to attract people to invest money in your business.
Obtaining bank loans may be easier.
There is no higher rate tax bands.
In the event of a partner leaving or somebody dying it is easier to continue the business.
It is easier to sell the business.
You have better standing in the public eye.
It can assist in the protection of a name.
People have more confidence in your business as they can check up on your limited company on the public records at Companies House.
Subcontractors and agency workers may find it easier to obtain work using a limited company

Disadvantages of a Limited Company

The preparation of annual accounts will probably cost more than a sole trader.
The public can check up on certain aspects of your business.
There is a considerable responsibility to paperwork and general upkeep of a limited company.

Limited Liability Partnership

A limited liability partnership is hybrid of a partnership and a limited company. The LLP is registered at Companies House and is treated like a limited company in most respects but the profits are divided amongst the partners who pay tax on their own share at the rate appropriate to their circumstances. An LLP must have a minimum of two partners and one of the partners can be another limited company. It is a flexible creature but has not proved to be particular popular for small businesses.

As a general rule you should discuss your choice of business format with a qualified accountant prior to commencement – it will be money well spent.

Personally I almost always advise the limited company route if a person has any concerns whatsoever regarding a potential liability, but ultimately the consideration of risk is but one factor in a decision that may be based on many variables. Whatever you choose I wish you every success.

Bottom Ad [Post Page]