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Legal Status of your business

The legal status of your business can depend on the type and scale of business that you are going to set up, you will also need to consider the tax implications.

If your enterprise has social aims you may also consider setting up a social enterprise or community interest company.

woman in red jumper smiling at camera writing legal status notes

Sole Trader

You can start trading very quickly without having to make too much investment and you have complete control over how your business is run. If the business is going to be dependent on you and your skill set then this may be the right option.

Advantages

  • Minimal cost.
  • No accounting or business audits.
  • Class 4 National Insurance payable as a percentage of profits achieved, as well as fixed-rate class 2 National Insurance contribution.
  • All profits form the business belong to you.

Disadvantages

  • Unlimited liability for debts incurred.
  • As the business grows, you may find it difficult to access finance as a sole trader.
  • Limited capacity for growth if the business is only reliant on your capacity to work.
  • Fewer entitlements to social security benefits should the business fail or struggle to survive.

Points to note

  • If your business is likely to reach the level required for compulsory VAT in its first year, you should register straight away with HM Revenue & Customs Visit www.hmrc.co.uk
  • You will need to keep accurate financial records, because you will be required to complete an annual self assessment form for tax purposes.
  • If finance or accounting is not one of your strengths seeking an external adviser is important to ensure that you do not fall foul of HM Revenue & Customs.

Partnership

In a partnership two or more people are involved in the business. They share the risks, costs and profits associated with the business.

Advantages

  • The business is more likely to survive if one of you decides to leave or becomes incapacitated.
  • Day to day management responsibilities are shared.
  • Different skill sets may mean the business has a better chance of survival.
  • More capital investment may be available.
  • You may find it easier to spend time away from the business.

Disadvantages

  • Unlimited liability for debts incurred.
  • Disagreements between partners may mean that the business is at risk.
  • All partners can be held responsible for any negligence that occurs.
  • The partnership has no legal existence of its own, and therefore should anything happen to one of the partners, the partnership act of 1890 will apply and the partnership will need to be dissolved.

Points to note

  • Each partner must register as self employed.
  • There is no legal requirement for a partnership agreement, however it is important to consider the implications, if the partnership doesn’t work out, an agreement will set out the basic principles, including share of profits and individual roles and responsibilities.

Limited Company

A limited company is treated as a separate entity from its owners, with its own legal existence. The company’s finances are separate from the personal finances of the owners.

Advantages

  • Limited liability for debts.
  • Organisation may have an unlimited lifespan.
  • Capital can be raised by issuing shares.
  • A board of directors and management team control the business.
  • Directors are salaried and pay tax in the normal way (along with class 1 National Insurance Contribution).
  • The business may be perceived as more professional than sole trader status.

Disadvantages

  • Costs associated with setting up and administering the business are higher.
  • Stringent accounting and auditing procedures apply.

Points to Note

  • If you require substantial start up funding, this form of company structure can provide protection. However directors may be required to give personal guarantees in order to secure funds.
  • It may be more beneficial to set up a limited company from a tax perspective, but this is dependent on your personal circumstances and earning potential

Limited Liability Partnership (LLP)

An LLP Partnership is a hybrid of a partnership and limited company, each partners liability is limited to the money that they have put into the business and the amount of personal guarantees they have given to raise any finance for the business.

  • At least two partners must be designated as members and have additional responsibilities.
  • An LLP must register at companies’ house and file annual returns.
  • If you are a member of an LLP then the profits are taxable as they would be
  • if you were a self-employed person and you are liable for class 4 and class 2 National Insurance Contributions.

Community Interest Company (CIC)

A CIC is a legal business status and has only been in existence for a few years. This is a company whose objectives are primarily social rather than profit making.  In order to become a CIC you must:

  • Pass a community interest test to show that the purpose of the business is primarily social.
  • Make sure that the memorandum of articles shows that you intend to benefit the community.
  • Use the profits and assets for the benefit of the community not just to benefit you or your employees.

Advantages

Access to sources of finance aimed at social enterprises.

Branding as a social enterprise which may provide a marketing advantage.

Points to Note You may also use other types of company set up if you are a social enterprise, it is important to seek advice from an adviser to identify which legal status suits the objectives of your business.

Further Help

Further information can be found if you visit Companies House

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