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Setting up a new business - #2 Legal Status

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The vast majority of small businesses in the UK are operated as sole traders, or via Limited Companies.

Sole Traders

The simplest was to startup is as a sole-trader. Essentially, your business income is counted alongside your existing personal income, so the accounting side of your business will be very straightforward. There are fewer administrative duties to be performed and the accounting side is simpler than under the limited company setup.

As a sole trader, you can quickly adapt to changes in your business with minimal bureaucratic changes required and you have complete control over your business and accounting affairs. However, a sole trader is also ultimately responsible for any liabilities should anything go wrong. It is worth spending time considering which set-up company format is best for you.

• Setting up as a sole trader

Limited Company

Aside from sole trader status, most small businesses operate as Limited Companies.

The term ‘limited’ derives from the fact that the company's finances are distinct from the personal finances of their owners (unlike the sole trader arrangement). Many client-facing companies prefer this route, since a limited company setup can appear more professional in nature when dealing with customers and suppliers. Additionally, you business finances are completely separate from those of your business.

Shareholders in limited liability companies are not responsible for company debts, although if required, directors may be required to guarantee loans or credit granted to the company.

• Setting up as a limited company

There are many taxation and administrative differences between these the two main types of small company setup types and you should certainly consult an accountant before deciding on the route you wish to take, since the simplest setup may not necessarily suit your business in the long-term.

Other Company Structures - Partnerships and LLP

If two or more people wish to go into business together, but without going down the limited company route, a partnership offers a simple way to get started, similar in many ways to going the sole trader route for an individual.

A partnership has no legal status, as a Limited Company would, it is merely a vehicle linking two or more self-employed people in a simple business structure.

• Setting up a partnership

An LLP is similar in some ways to a standard Partnership, except that the individual members have lower liabilities to any debts which may arise from running the business.

There are more administrative duties involved compared to the Partnership siness structure. In fact, an LLP is more similar to operating a Limited Company.

• Setting up a Limited Liability Partnership

Choosing a Business Name

When starting up a new business, one of the first things you need to do is choose a suitable name for your enterprise. It is worth spending time considering the name, since not only will this be the first thing potential customers see, but it will also be with you for the duration of your venture.

You will also need to abide by the various rules and restrictions imposed by company law when making your choice. If you are an online business, you may also wish to buy a domain name presence which is similar to your company name.

• On to Part 3 - Legal Status (Accounting and Taxation)

Posted January 5, 2006