The legal form a business takes needs to be decided upon by its owners upon setting up or a decision may be taken to change the form later, for example, when the business is considering expansion. The basic choice is between carrying on business as a Sole Trader, in Partnership, a Limited Company or a Limited Liability Partnership (LLP).
This highlights some factors to be considered when deciding upon the appropriate business medium.
A sole trader will be personally responsible for all the debts and liabilities incurred during the course of trading. However, there is no formality to starting or ending the business. He/she will have full control over daily decision making and running of the business. The business affairs tend to be private and not open to public inspection.
All partners are jointly and severally liable for business liabilities. That is, a claim can usually be brought against one or all of the partners individually or collectively. Formation and start up can, again, be informal but it is advisable to put in place a partnership agreement. The Agreement should cover things like decision making, roles, distribution of assets, profit share etc. As with a sole trader, the business affairs, accounts etc are a private matter and not open to the public.
The biggest deterrent to forming a limited company is the formality and red tape. Incorporation is achieved by submitting various forms and the appropriate fee to Companies House.
A company has many obligations under the Companies Act 2006 and other legislation which includes the filing of annual accounts and returns. These documents are open to public inspection. The directors will run the company but the company is owned by the shareholders. In smaller companies, the directors and shareholders are usually the same people but it is important to recognise the distinction. Directors may be removed by shareholders and could be personally liable for acts of negligence or wrongdoing. Shareholders liability is limited to the nominal value of the shares held.
Limited Liability Partnership:
Limited Liability Partnerships are incorporated by sending forms and a fee to Companies House much the same as a limited company. The LLP is owned by members and, whilst there is no legal requirement for a members’ agreement, it is prudent to have one drafted. Every LLP is required to have 2 designated members who have additional responsibilities for things like signing and delivering accounts to the registrar. Individual members can be liable for things like negligent advice. However, in the normal course of things, the liability of members is limited to their capital investment, as any claim will usually be brought against the LLP as a separate legal entity.
Limited liability is the main attraction of a limited company or LLP but this has to be weighed carefully against the public disclosure of trading and accounts.
This should not be relied upon for legal advice. If you would like any further information or advice please email email@example.com.