What legal formation is best for your business?
Jan 25, 2018
You’ve come up with a brand. You’ve honed your product or service. Your business may look like it’s ready to go. But there are important formalities to get right first. One of the most significant decisions that you will need to make at this early stage is about the legal status that your business will hold.
You have three main options – sole trader, limited company, and partnership. The trick is to understand exactly what each option would mean for you because they vary significantly in terms of their effect on personal liability, tax, accounting, and the general running of a commercial enterprise.
A sole trader set-up is often seen as the easiest way to get a business off the ground. It doesn’t require many formalities, and there isn’t the added complication of a distinction between the business owner and the business itself; as a sole trader, you are the business. But being a business brings with it some disadvantages – most notably, unlimited personal liability.
That is one of the reasons why some people opt instead for a limited company, a key advantage of which is that – as the name suggests – the liability of the business owner(s) for the company’s debts and other obligations is limited. Some people also feel that trading as a limited company offers more gravitas than as a sole trader, but that doesn’t necessarily follow. And the level of formality (and associated cost) that comes with setting up and running a limited company can be off-putting.
The third possibility is partnership. There are two options: a standard partnership in which each partner bears responsibility for the debts (and other liabilities) of the business; and a limited liability partnership, which offers some vital protection when things go wrong.
The ins and outs of each type of business structure would make for a very long read. Suffice it to say that choosing the best legal entity should be a process; one that you embark on with the help of a solicitor who will get to know you and your commercial plans, your market, your financial situation, and your exposure and attitude to risk. And, above all, it’s so important to be able to make your decision with confidence, in the knowledge that you are setting your business off on the right track.
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