The Legal Form Your Business Should Take

You have a choice to make on how best to legally organize your business, as a sole trader, partnership or limited company. Broadly speaking sole trader is the simplest and limited company and the most complex way of setting up a business, but each of the three methods provides advantages and disadvantages according to the type of business you operate. A professional advisor will be able to give you more detailed advice on which will be the most suitable arrangement for you. However, the following guidelines I have provided will help you in the early stages.

Sole Trader

The sole trader embodies the spirit of the small business person. It is you, on your own or just making a go of it. The bookkeeping and accounting side should be very straightforward, although it is always helpful to seek professional advice. You are however, totally responsible for any liabilities you incur in your business, which means you’re personal as well as your business assets may be at risk.

Partnership

A partnership shares many similar characteristics of a sole trader in that it is simple to establish, but as its name implies, it involves two or more people jointly running the business.

Although you do not have to formally register a partnership, I strongly advise that you draw a partnership agreement with the help of a professional. Among other things this will outline exactly who has put what into the partnership, how the profits will be split, who does what work, and what happens if the business is wound up.

On top of this legal basis, you must ensure that you can trust your partner(s), because in theory at least each partner is personally liable for all debts incurred by the business. Through no fault of you own, you may find yourself paying off substantial debts, which your partner(s) may have has run up without telling you.

Limited company

A limited company is different from a sole trader or partnership in that it is an entity separate from its owners. As such, you would not usually be personally liable for its debts because normally creditors can claim only the assets of the business (although you may be asked to give personal guarantee on certain loans and liabilities)

A limited company is a little more involved to create, and I also strongly advise that if you wish to set up a limited company you seek the advice of a professional (an attorney or accountant). You must register the company and have properly audited annual accounts.

Limited companies have the following characteristics and requirements:

(a) They need to be registered

(b) They are owned by shareholders

(c) They are managed by directors who are appointed by shareholders. In the majority of small limited companies the directors are also the shareholders.

(d) The rules for managing the company, including what the business can undertake and the power of directors are set out in a document called the “Memorandum of Articles of Association.”

As in a partnership, a limited company will often involve working with other people and again it is vitally important that you can trust your colleagues and will be able to enjoy working with them. Should the relationship breakdown, a business can be severely damaged, or even brought to its knees, while people try to untangle themselves.

When starting a business you should do a deep research and understanding on the legal forms I just supplied to you. These can be a make or break for the success and future of your business.