Starting your business

Jul 7 2005 By the Evening Gazette

Once you have made up your mind to go ahead, you need to get to grips with the legal requirements for forming a business.

Setting up your business in the right way keeps costs down and can also help prevent your working relationships turning sour, one of the major causes of business failure.

There are four main choices for the legal form of your business.

Sole trader

Most small businesses find that setting up as a sole trader is the best option.

Advantages include:

You can keep simple, unaudited accounts.

National Insurance is low.

Unless your earnings are high, total tax payments can be lower than if you formed a limited company.

Setting up is quick and easy.

You can form a limited company later and transfer the business to it, though some stamp duty may have to be paid.

Disadvantages include:

You are personally liable for all your business debts, which means that your own assets are also at risk.

You are entitled to fewer social security benefits.

Your options for raising money are limited.

If you are a sole trader, it is harder to sell the business or pass it on.

Partnership

A partnership has similar advantages and disadvantages to a sole trader. However there are two other factors to take into account:

Each partner is personally liable for all the business debts of the partnership, other than tax on profits, even if another partner caused them. You may be able to raise money by introducing new partners.

You can set up most partnerships with a few formalities, however to avoid disputes, it is vital to have a comprehensive agreement drawn up by a lawyer and agreed by all partners.

Limited company

The advantages of having a company tend to increase as your business grows, including:

A limited company has more credibility. Normally, your liability is limited to the amount you agree to invest in the company by buying its shares. However, there are still circumstances where personal liability may arise.

It is easier to raise large sums of money for the business or sell a part of the business. There can be tax advantages for high earners through keeping money in the business or making pension payments.

The disadvantages are associated with greater costs and obligations, including:

Annual accounts are generally more complicated.

If you have a high turnover, an independent audit is compulsory.

National Insurance payments are higher. You will have to pay employer's as well as employees' National Insurance contributions on salaries, including those of company directors.

If you decide to cease trading, it can be more difficult and expensive to wind up the company.

Limited liability partnerships

It is possible to set up a limited liability partnership. Despite the name, this is not a partnership.

It is a corporate body with its own legal identity and capacity.

Members can limit their liability for losses.

It has the organisational flexibility of a partnership.

The members' agreement is confidential.

It is taxed as a partnership - tax is charged on all the profits, whether or not they are distributed to members.

Annual accounts must be prepared and filed.

Withdrawals may be clawed back if the limited liability partnership is declared insolvent within the next two years.

A limited liability partnership must be registered at Companies House.

Working relationships

If a business is going to have more than one owner, the owners must determine what their working relationship will be. It is vital to discuss the main issues and write down an agreement.

In the case of a business trading as a partnership, it is normal practice to draw up a formal partnership agreement, which everyone signs.

Business name

You can trade under your own name, or choose a different business name.

A sole trader can use his or her own name or a business name. eg Peter Smith or Peter Smith Services. A partnership can trade under the names of all the partners or a business name.

A limited company or limited liability partnership can trade under its registered name or use a different business name.

Other points to consider

Choose a name that will create a positive impression and help your marketing.

To protect your business name from use by others you can register it as a trade mark, or a domain name, for your website and email addresses, or both.

Check you are not infringing any trade marks.

Certain names are not allowed, including those considered offensive, misleading or likely to cause confusion with an existing business.

Check the name you want to use, or one close to it, is not being used by another business in a similar line.

Certain words are prohibited by law, e.g. British, Royal and Bank.

Only limited companies can use the word Limited or Ltd in their names.

Other words may need to be justified - e.g. international.

Only limited liability partnerships can use Limited liability partnership or LLP.

Other legal requirements you should consider include:

You may need some form of licence, e.g. for running a nursing home or a betting shop.

Do you have adequate insurance?

Get your tax, National Insurance and VAT affairs organised.

You must ensure your premises comply with property regulations.

You must comply with health and safety regulations, even if you are home-based.

Make sure your new business complies with environmental regulations.