When creating a new business, it’s important to consider the right legal structure for you; Sole Trader, a Limited Company, or maybe a Partnership? Not sure? To help you on your way, we’ve laid out the basics of each structure below.
- Sole Trader
If you’re self-employed individual running your own business then one option is to become a Sole Trader. This is the cheapest (it’s free!) and easiest way to get set up your business and get going. As a Sole Trader you can employ people, but you’ll have personal responsibility and personal liability for your business. This means business debts can become your personal debts. This also means personal assets can be used to pay off those debts.
- Limited Company
Creating a Limited Company will involve more administration, rules and responsibilities. However, the long term benefits might just be worth it. A Limited Company will separate your personal finances and assets from those of the business. You’ll become a director and a shareholder (to start with, probably the only shareholder) in the business. Importantly, as a director you’re an employee of your own business, so your personal assets are protected against any business debts. Remember, though, if you’ve made a personal guarantee for the company's borrowing (which is often required by banks), you’ll still be liable. If you’re going limited just to protect yourself against debt, bear this in mind.
As a partnership, you’ll set up your business with a partner (or maybe a number of partners) and you’ll each share responsibility for the business. Each partner will pay tax on their share of any profits and each will be personally liable for their share of any business debts.
- Limited Liability Partnership
Just like a Limited Company, those setting up a Limited Liability Partnership (LLP) will not have personal responsibility for any business debts. As with a partnership, partners pay tax on their share of any profits.
Don’t worry! This is flexible
Once you’ve chosen your structure, it’s possible to change to another in the future if it’s the right decision for your business.
We’ll be posting our follow up ‘Starting a Business – Part 2: Who Needs to Know?’ in the next few days. Part 2 will cover the next steps for your business in more detail.
If you can’t wait that long, our dedicated business advisors will be happy to answer any questions you have.