How do I decide?
The best option is the balancing of a number of factors. This includes the amount of personal responsibility you are willing to accept in relation to business debts, your personal tax situation and the amount of administrative work you would like to have, and the way you wish your company in the eyes of others.
The right type of business form can help to prevent the relationship from becoming sour—one of the main causes of failure in business.
Sole Trader
If it’s an affordable start-up and you’re not likely to be required to borrow money to expand your business, then this won’t matter as much, but it shouldn’t be repeated enough that if you’re a sole-trader, you are the sole person to pay the cost for any obligations made by the company.
A sole-trader may be in a lonely and vulnerable situation. The benefit of being your own boss is offset by the lack of someone to accredit your decisions. Your debts are your responsibility as well as future obligations. If you’re sued, you may be declared bankrupt because of personal debt. Your assets, including your home and your family members, are at risk.
Partnerships
A partnership is the best option. If you offer services to those whom you are familiar with. Many domestic and building businesses are partnerships or sole traders, but keep in mind that if you want to get subcontract work from larger corporations, you may require incorporating to meet their requirements.
In a typical partnership, like sole traders, the partners are accountable for the entire debt that the business is liable for. This isn’t just for the debts you’ve incurred as a partner, but the debts of all partners; therefore, you should be particularly attentive in the actions of partners you do business with.
Limited Company
The risk you take for yourself is usually restricted to the amount you put into your company and the personal guarantees that you provide to secure financing (such as bank loans). If the business is placed in liquidation, the company’s outstanding creditors are paid by funds from the sale of the assets of the company. Corporate debts are not likely to influence directors’ personal credit scores.
You need to draw up an agreement between the company as well as articles of association (you can use the standard model articles from Companies House). They define who will be making up the company and the way it will operate by way of example, for example, the way in which decisions are taken and the way shares are handled.
The memorandum and the articles should be delivered at Companies House along with Form IN01. It is possible to register online if you’re using the sample articles.
You should nominate at least one director for the business. It is not mandatory to nominate a company however, you are able to decide to do this if you would like. There is a possibility for directors to have both roles.
Limited Liability Partnership
An LLP offers the flexibility of organization of the partnership. Members share management responsibilities, and it is possible to invite new members to raise funds.
Each member’s responsibility is limited to the personal guarantees they’ve made to secure finance, as well as the amount they’ve personally put into.
You must register with the Companies House and are subject to similar obligations as the Limited Company.
Summary
This is the most brief glance, and we’ve not even considered other forms like Community Interest Companies of Social Enterprises, which are for businesses that have the social benefits. You’ll see that the type you pick is a hard choice, and the impact of your decision is a bit ambiguous.
We recommend expert advice even if you’re just in the planning stage and you later decide to set up the business by yourself.