The three main types of business are:
* Sole Trader - Consists of a single sole owner who owns all the assets of the business and which has no legal incorporation. The owner has unlimited liability of the business. * Partnership – Similar to a sole trader except there are more than one owner (normally 2-20). Partnership is a contractual agreement under a contact uberrimae fidel (utmost good faith). Owners are ‘jointly and severally’ liable and liability is unlimited. * Private (Ltd) and Public (PLC) Limited Companies – Limited companies are legal entities in their own right and have a formal incorporation process. Owners (shareholders) have limited liability.
The main advantage of setting up as a sole trader business is that it is relatively cost free and easy. With no legal incorporation formalities to complete there is little in the way of red-tape to start a sole trader business and the owner can keep simple unaudited accounts. To set up as a sole trader the owner will have to register as self-employed with HM Revenue and Customs within 3 months. Another big advantage of setting up as a sole trader is the owner owns all the assets and makes all the decisions with no one to answer to, enabling the owner to make decisions without any hindrance or interference from boards, shareholders etc. It also means that all profits go to the owner
However, setting up as a sole trader also means that the owner has sole responsibility for the business and therefore unlimited liability for all debts incurred by the business. Being a sole trader can make it harder to raise capital as well. Without being publicly registered, banks will be less inclined to lend and may look to secure any lending against personal assets, such as the home. With no shares to offer either it is hard to attract finance from investors.
Setting up as a partnership has many of the same advantages as a sole trader with little red-tape and no legal incorporation formalities but with the obvious exception that there is more than one owner of the business (between 2 and 20). To set up as a partnership a contractual agreement will be entered into known as a Partnership Agreement. This will set out the structure of the partnership. Under the Partnership Act 1890, the partnership will provided with a separate legal identity distinct from the partners allowing it to enter into third party contracts but there is still no obligation to formally register with the Register of Companies.
However, as with a sole trader business the downside is that there is unlimited liability for all the partners. Furthermore, all partners are ‘jointly and severally’ liable for actions and debts of the firm even if caused by another partner. Also setting up as a partnership can have complications down the line if conflicts arise between partners. Again, as with a sole trader, it can be hard to obtain finance with banks less likely to lend without sufficient securities and investors unlikely to put up capital with no shares to offer.
Setting up business as a Limited Company is much more complex. Compared to sole traders and partnerships there is a lot more bureaucracy and red-tape involved in the setup of a limited company with a formal legal incorporation process. This involves registering a name with the Companies House (note: there are certain restrictions on the names you can register like an existing registered name or names containing ‘Royal’ or ‘British’) along with supplying a Memorandum and Articles of Association, details of the directors, company secretary and shareholders as well as a registered office address. It is also advised to draw up a shareholders agreement to help all members know where they stand.
There are costs associated with starting up a limited company such as registration fees, potential accountant/lawyer fees and (with staff and premises) insurance such as Employers Liability...
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