Going into business for yourself? How do you structure your step forward into the world of business?
15th October 2021
Whether it’s going into business on your own or with someone, it is very difficult to choose how you want to structure how you go into business. There is always the risk that something may go wrong. Below, Kyle Smith gives a quick guide to potential ways you could structure that step forward.*
It is important to note that there is a common misconception that a business is a company. A business is the physical trade that is carried out. For example, the supermarket you go for your weekly shop in may be owned and ran by a large company, but the actual business is the selling of items to the public. A business can be owned and ran in a number of different ways Below is a simple guide to some of the options.
A sole trader is simply the businessperson working on their own behalf without any other entity, all of the debts and liabilities for the business will be in their name. meaning that they would have to pay 100% of the monies owed to their creditors potentially putting any assets in their name at risk if they cannot afford to pay the debts that their business incurs including sums owed to any of their employees.
Private company limited by shares
Perhaps the most common and well-known entity in the UK business world. A private company limited by shares (commonly referred to as a limited company), is a structure used by many to limit their liabilities for the debts of their business. The debts, contracts and other potential liabilities would be entered into as the company. The company is treated as a separate legal entity to the people (shareholders) who own the company through its shares. A shareholder is only liable for the face value of their shares, if there is the unfortunate scenario where a company becomes insolvent and wound up, unless a shareholder has personally guaranteed the repayment of a debt or performance of an obligation, they can only be liable for the face value of their shares.
You can own and run a company either on your own or with other people, to see how you can manage your relationship with the other shareholders in your company and their rights please see our article on shareholder agreements here.
Public Listed Companies (or PLC’s) are companies that are listed on the stock market and their shares would be available for sale to the public on those stock markets. The holders of those shares are again only liable for the face value of their shares (even though they may have paid much more to buy their shares). There are specific criteria for a company to be a PLC and it is not likely that a new business would begin as a PLC.
The Partnership Act 1890 governs partnerships, partnerships are formed of more than one person (please note that companies are also considered persons therefore it is possible for companies to be in a partnership) who would share the profits of the business amongst them equally (unless defined in a agreement between them as otherwise), the liability for a partnership is joint and several between the partners meaning that a creditor could begin proceedings against any partner or multiple partners for the sums owed.
If there is no written partnership agreement that specifies otherwise, a partnership may end if a partner dies or becomes unable to manage their own affairs. Partnerships can also be ended by agreement.
Partners have rights and the relationship between business partners can sometimes be difficult for more information on this and how you can seek to regulate that relationship please read our article on partnership disputes here
Limited Liability Partnerships
The Limited Liability Partnership (“LLP”) is a concept created in 2000 in the “Limited Liability Partnership Act” to answer a call to encourage entrepreneurism and new ideas. The LLP model is very popular amongst law firms (both domestic and international) and accountancy practices.
A limited liability partnership is separate to the law of partnerships, it is governed by its act of parliament. The partnership will not be dissolved if a member (commonly known as partner) dies or is deemed insane and incapable of managing their own affairs.
Each LLP is effectively unique, the relationship between the members and how they operate is set out in an agreement which is private to each LLP and is not required to be published at Companies House. The members of an LLP are required to contribute to the assets of an LLP if it should be wound up, but they are not liable for the debts of the LLP should it not be able to pay all of its debts.
For further Commercial advice, whether a new business or established, please contact our experienced Corporate Team
* this guide concerns only the legal side of potential ways a person may structure and control the risks of going into business. There are, of course, tax ramifications for each of the options above which you are strongly advised to seek professional advice on before choosing.