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Choosing a business type
Choosing a type of business is an important decision. Things
can always be changed later on, but this often involves paperwork
and sometimes accountants and solicitors - so best to get it right
first time!
SOLE TRADERS
In the UK, anyone may trade under any name (with a few small
exceptions mostly to do with "passing off" - i.e. being
confusingly similar to another Company). In this situation a
person (e.g. John Smith) does business as another name (e.g.
Smith Enterprises). Sometimes you see this written as
John Smith T/A Smith Enterprises which means trading as.
Another common abbreviation is DBA; doing business as.
Sole traders are liable for all debts their businesses build up.
This means there is no distinction between the debts of the business
and those of the individual. Should a sole-trader business get into
financial difficulties, the person is responsible for paying the debts.
This might seem obvious, but under UK company law there are alternatives
which provide a limitation of the owner's liability. Sole traders do
not need to file a public set of accounts.
PARTNERSHIPS
Partnerships are similar to Sole Trader businesses, except there are
more people involved. Each member of the partnership is liable for the
debts of the company. The term used is "jointly and severally" laible.
Partnership agreements are legal documents that lay down the structure
of a partnership. Partnerships do not have to file accounts publically.
Solicitors and accountants often operate in partnership.
If you are thinking of operating a partnership, make sure you take
appropriate legal advice before doing so. If the actions of other members of the
partnership result in the business failing, you could still be personally
liable for its debts.
LIMITED LIABILITY PARTNERSHIPS (LLPs)
Limited Liability Partnerships (LLPs) came into effect in the UK in the year 2000.
A Limited Liability Partnership is one which is registered with Companies
House. It is a corporate entity (i.e. separate legal entity from its partners),
and partners individual liabilities are limited. Tax issues are handled in the same way
as a partnership (and there are no shares, so no dividends). LLPs are also required
to file annual accounts - in exactly the same way as Limited Companies and PLCs
(see below).
PRIVATE LIMITED COMPANIES (LTDs)
A Limited Company has a separate legal identity from its owners and
managers. This means it has its own bank accounts, its own responsibilities
and debts. It can be sued. In other words it can in some circumstances
provide its owners with some protection, should serious problems arise.
Some businesspeople can gain tax advantages from operating a Limited
Company. The most common tax advantage involves holding shares in
the company upon which dividends are paid to the shareholders.
Dividend payments are generally taxed less than salary (and National
Insurance is not payable on them, as they are not classed as earned
income. However tax law is changing all the time.
In order to form a Limited Company you must approach an incorporation
agent or request an incorporation pack from Companies House. Doing
either of these is not difficult or particularly expensive, but
there are legal responsibilities that you must be aware of before
becoming a Company Director or Company Secretary.
PUBLIC LIMITED COMPANIES (PLCs)
Essentially PLCs are the same as LTDs, except that a Limited Company is
restricted in who it can sell shares to. The "public" in Public Limited
Company menas shares can be offered to the open market. In order to run
and trade a PLC there are more rules and regulations to be adhered to,
and fines and penalties for non-compliance are more strict.
Often, a business will trade as a Limited Company for a number of years
then change its status to a PLC in order to raise funds further down the line.
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