Risky Business

Being an entrepreneur is risky business, with start-ups in particular usually adopting a “learning by doing” approach. Experience is hard earned, with success or failure requiring a measure of luck as well as business nous, especially in those early days.

Thankfully, as access to information became as easy as a click of a button, business knowledge and equally, business interest from the general public has increased. This is evident in the rise of business focused education and professional services dedicated to training and coaching the very same thing. Further proof can be seen when you consider how many people follow Richard Branson or Alan Sugar on Twitter, as well as the regular viewership of television shows such as “The Apprentice” or “Dragons Den”.

From the outset, any budding entrepreneur should consider which legal vehicle they wish to run their business from. In the UK, the majority of small to medium sized businesses are run either by sole traders, as a general partnership or as a limited company. As a general rule of thumb, paperwork increases and legal risk decreases as you move from the former to the latter.

Sole Trader

As a sole trader, you manage and own the business as an individual and are self-employed. What this means is that you keep all the business profits after you’ve paid tax on them but you are personally responsible for any losses that the business makes. While administrative requirements are low, you must register with HMRC and keep records of your business sales and expenses, prepare self-assessed tax returns each year and pay income tax on your profits and national insurance contributions to HMRC.

Partnership

As a general partnership, you manage and own the business with others and register the partnership and all partners with HMRC as self-employed. Other than keeping records of the partnership sales and expenses and preparing self-assessed tax returns for the individual partners each year, there are no formation or ongoing filing requirements as a general partnership arises under legislation when two or more individuals carry on a business with a view to profit, regardless of whether or not the individuals intended for a general partnership to be formed. In these circumstances, usually the partners would enter into a partnership agreement to set out their respective rights and obligations to each other as relying on the default position in the legislation could have undesirable results.

Partnership profits are shared between the partners who pay income tax on their share and national insurance contributions to HMRC. Responsibility for partnership losses and expenses are still personal but shared between the partners either joint or severally or joint and severally depending on the nature of the liability.

Limited Company

A limited company is different from the two business models mentioned previously as it has its own separate legal personality distinct from either its managers or owners who, unlike for a sole trader or general partnership, do not need to be the same people.

What this means is that the managers and owners are not personally responsible for the company’s debts and the company can hold assets in its own name and have its own separate finances. This benefit is balanced by more stringent rules and regulations, in particular the Companies Act 2006 which was the longest act in British parliamentary history when it was passed.

The company will need to be incorporated formally at Companies House which requires the submission of certain information and documentation which must be kept up to date, together with the ongoing filing of confirmation statements and accounts going forward. The company must register with HMRC to pay corporation tax on profits and the owners will have to pay any tax personally on dividends paid from distributable reserves.

Therefore, while there are many advantages to using a limited company, the increased regulation and administrative burden means that care must be taken to ensure that the checks and balances in place which are designed to protect the public as well as the managers and owners are complied with.

Did you know Machins Solicitors offer free 30 minute consultations on all areas of business law from 12-5pm on the first Thursday of the month at Regus, Breakspear Park in Hemel Hempstead? Please call 01582 514331 to make an appointment.

If you would like to discuss the matters raised in this article or any other aspect of commercial law, please contact Sing Li, Solicitor, on 01582 514356 or by email on [email protected]