Business Structure
From Entrepedia: The Entrepreneurship Wiki
The way that a venture is structured will inevitably have an impact on, and be influenced by, the nature of the venture itself: the product or service that is being offered, the target market, the industry within which the venture falls. Each of these factors should be taken into account when you decide to structure, or change the structure, of your venture.
Contents |
Sole Trader
Sole trader is the term applied to a person who establishes a business for himself with a view to making a profit. Local Electricians, bakers or greengrocer are likely to be sole traders. The main advantage of being a sole trader is that there is no statutory requirement on you to keep accounts in any particular form.
One big disadvantage of being a sole trader is the prospect of unlimited personal liability for all trading debts: Meaning that a sole trader can be made personally bankrupt. Also as a sole trader you can employ as many people as you like, but you are the only responsible officer of the business. You are therefore liable for the actions of your employees.
Overall:
- Advantages
- Trading as a sole trader means you have total control
- You have no requirement upon you to file annual returns at Companies House
- You can offset schedule D tax allowances against income tax
- A sole trader avoids 'double taxation'
- Disadvantages
- You have unlimited personal liability for debts.
- Sole traders can go out of business easily and 'disappear' meaning that it can be hard to raise investment.
A sole trader business is simple to set up, with a form sent to the Inland Revenue within three months of starting the business and PAYE Registration and VAT Registration where necessary. A sole trader's business is an extension of their personal affairs with the result that, if the business ends with monies owed, creditors can sue the individual and personal assets can be at risk. (i.e. there is no limitation of liability) The sole trader pays income double taxation Ukraine only on the profit made, not on monies withdrawn from the business.
Partnership
You could also enter into business with someone else and form a partnership. This has certain legal implications. A partnership is defined as a "relation which subsists between persons carrying on business in common with a view to a profit".
Again formalities are not required to form a partnership - but producing a written contract with the terms of the partnership agreement is definitely beneficial. This document is called the "partnership deed" or "articles of partnership". Your Solicitor can help you write a partnership agreement. However if no formal agreement has been drawn up then the position is regulated by the Partnership Act 1890.
Persons who have entered into a partnership are collectively called "a firm". A firm can have anywhere between two and twenty partners. It is important to note that business decisions made by one partner bind both the firm and all the other partners and each partner is personally liable for all the debts of the partnership. Also if the firms' assets fail to meet a debt that is called in then the partners' own personal assets may be called upon. The partner, like the sole trader, can be made personally bankrupt.
A partnership arises where two or more persons run a business and share the profits in an agreed manner. It is advisable to have a partnership agreement drawn up by a solicitor in order that any disputes can be settled. Again, there is no limitation of liability on either partner. It is simple common sense that you must wholly trust, respect and be able to work closely with any partners that you have in business. This is critical.
In most respects, a partnership is simply two or more sole traders trading together, and are taxed in that way, i.e. in the same way a sole traders. A recent variation is Limited Liability Partnerships but these are probably only applicable to larger partnerships.
Asset based businesses are generally better held in an individual's name or a partnership as long as there is limited risk, given that the capital taxes relief is much more attractive to individuals than to limited companies. Trading profits are generally better taxed on a limited company, especially where earnings per partner exceeds £35,000. Although you do need advice from an accountant as, whilst this is the general rule, your individual circumstances can alter the optimum structure.
Limited Company
A limited company is a separate legal entity from its owners and managers and hence provides limited liability to owners (shareholders). A limited company can be purchased for a minimal cost but there are some compliance costs involved running a limited company including the fact that accounts are a matter of public record (although for small companies abbreviated accounts can be submitted which reveal very little). Owner/managers can take remuneration either by salary or by dividend or by a mix of both. Corporation Tax is paid on the profits of the business, that is profit before dividends are paid. The accounting requirements of limited companies are governed by The Companies Acts and are more onerous than those of sole traders and partnerships. The statutory accounts have to be produced in accordance with The Companies Acts also. Limited companies will require an audit if their sales exceed a specified threshold (of millions rather than thousands of pounds).
Companies are separate legal entities in their own right and, meaning a can continue forever despite changes in ownership or management.
A company as an ‘entity’ can open a bank account, borrow money and operate just as a person might. A company can offer "limited liability" to the owners (shareholders) and directors, which stops the owners of the company from being sued for the debts of the business. Liability to creditors is limited to the amount of share capital and any capital assets that are vested in the company.
However, in the case of a limited company, ultimate control of a company is in the hands of the shareholders (members) who must meet every year at an annual general meeting to, amongst other things, elect the board of directors. In small companies the shareholders usually perform the role of the board of directors and management.
Types of Limited Company
There are a few different types of limited companies, each with their own benefits and drawbacks, and each suited to different types of ventures:
- Company Limited by Shares - The liability of a shareholder is limited to the nominal value of the shares. In this case if the company is successful then the value of the shares will increase but if the company fails the shareholders can lose their investment.
- Company Limited by Guarantee - The shareholder personally guarantees to contribute a fixed sum to the assets of the company if that company fails. This type of company has no share capital.
- Unlimited Company - The shareholder liability is not limited. This formation is particularly rare.
- Public Limited Company - The shareholders' liability is limited to the value of paid up shares. The minimum capital requirement is £50,000 and the Memorandum of Association must specify that it is a Public Limited Company.
Therefore if you are seeking funding, you should be aware that the type of formation you choose can directly affect your chances of gaining funding from certain bodies. In general there are two types of initial investments:
- Development capital investment
A DCI is a type of initial funding where a venture capital fund subscribes to new shares of a start-up company or purchases existing shares.
- Buy ins/outs.
Buy - ins/outs occur where management and capital fund providers combine with other investors to form a new company to buy out of or into an existing business.
Capital investors invariably prefer limited company formations for the simple reason that control can be easily maintained as the company is confined to a strict regulatory environment. However Banks, may be more likely to favour other types of formation due to limited liability status and the costs of winding up a newly limited company.
Advantages
- Limited liability
- Capital can be raised through the issuing of shares.
- The company does not cease to exist because a director or shareholder dies.
Disadvantages
- The advantage of limited liability can be quickly negated through the imposition of a personal guarantee.
- Control is limited
- There is 'double taxation' i.e. a company pays corporation tax on its profits.
- Shareholders pay capital gains tax on sale of the shares and income tax on the dividend.
- Must keep statutory books.
- Legal costs can be high in the event of the company having to cease trading.
