A question often asked by individuals starting a new business is what structure their business should have. Should they trade as a sole proprietor, partnership or limited company? Each has its own pros and cons.
Ownership of assets
In an unincorporated business, the individuals are the legal owners of any assets of the business including property, vehicles and stock etc. In a limited company the shareholders own shares in the company and the company, not the shareholders or directors, owns the assets.
Starting out as a sole trader or partnership is often a popular choice as neither requires registration of the business with Companies House, although there are HMRC registration requirements. A company must be incorporated and registered at Companies House and the directors must submit annual confirmation statements and accounts.
Business Name and goodwill
A company name will automatically be protected once it is incorporated at Companies House and no other company may use that name. There are no requirements for a sole trader or partnership to register a business or trading name and no automatic rights of protection of that name. Perhaps the business will become a limited company in the future – if so then the name may be protected by incorporating a company at Companies House which remains dormant until the business decides to start trading as a company.
A sole trader or partners in a partnership will be personally liable for their business’s debts. If a company cannot pay its debts, neither the shareholders or directors are personally liable so long as they have not been negligent in their duties or provided personal guarantees on any borrowing by the company.
An unincorporated business does not have a distinct corporate identity save for its non-registered trading name. A limited company often carries a corporate image and could be perceived as a bigger (and perhaps more successful) business entity which attracts more customers. A company will have a share capital and may issue shares to investors in return for investment into the company.
Partners and sole traders take a share of the profits of the business. Directors of a company can take a directors’ salary which will be taxed under the usual PAYE scheme. Shareholders’ income is by way of a dividend. This will have its own tax liabilities and depends on whether the shareholder is basic rate or higher rate taxpayer.
Whilst the death of a sole trader or partner will often mean the end of the business, a Company can survive after if and when directors and shareholders leave the company or sell their shares which can be transferred from one person to another.
If you are thinking or starting a new venture or even incorporating an existing business, then the legal experts at Wolferstans can talk you through the points raised in this article and ensure your business gets off to the best start.