Starting in business

Getting off to a good start

We offer an initial consultation, without charge, to help you clarify you plans and get your administration and tax reporting off to a good start. One of the issues we would discuss it the appropriate form of business organisation.

The choice of business organisation

An individual can be in business as a sole trader or as a limited company. If he goes into business with a friend or member of his family he can be in business in partnership or as a company or LLP.

Until April 2001 the two main types of organisation for people in business together were the partnership and the limited company. From April 2001 the limited liability partnership (LLP) is also available. So far not many businesses have chosen to trade as an LLP but we think that these will eventually become popular, as they are in other countries.

 

One person organisations

Sole trader

A sole trader is simply an individual in business for himself. He is fully responsible for the business and its debts. He pays tax and national insurance contributions on his profit. A sole trader is useful when:

• Simplicity and low cost is important. Just register with the tax office within three months to pay the class 2 (fixed weekly rate) of national insurance contributions.
• Prefer privacy, the public cannot inspect your accounts.

Limited company

The company and the owner are separate persons and each pay tax. This structure is suitable when:

• There are risks for which insurance is not available.
• Some owners or investors are not involved in management.
• A large part of the profit is retained for investment.
• An image is important.

But

• Formalities must be followed and there are some administrative expenses.
• Taxation burden may be higher than a partnership unless part of the profit is retained in the business.
• Difficult and expensive to arrange shareholdings for staff.

 

When sharing the business with another person

Partnership

Two or more people in business together. Useful when:

• Flexibility is important. Can easily change the membership or profit sharing.
• There is low commercial risk or risk capable of being covered by insurance.
• Most of the profit will be drawn out of the business.
• Small ventures where low administrative costs are important

But

• Tax inefficient if a significant part of the profit has to be kept in the business to pay off debts or finance expansion.

Limited liability partnership

These organisations are companies for company law purposes, but are taxed as partnerships. They are suitable when:

• There are risks for which insurance is not available.
• Need flexibility to easily change the membership or profit sharing.
• Most of the profit will be drawn out of the business.

But

• New and unfamiliar. May have to explain to customers or suppliers.
• Taxation burden may be high if a large part of the profit is retained to finance expansion.

Limited company

See above for the main features, but when owned by more than one person:

Difficult and expensive to re-arrange the ownership to change the profit sharing or to introduce new owners or to deal with resignations.

 

Common to all businesses

All businesses must show some information on ALL business letters, emails and purchase orders.

A sole trader or partnership must show the name of the owner (or the names of all the partners) and the address of the main place of business.

A limited company or limited liability partnership must show:

• The full name as registered at companies house.
• Place of registration, normally - Registered in England and Wales.
• The registered number.
• Registered office address.
• In the case of an LLP, the fact that it is a limited liability partnership.