Starting up in business

Jun 27 2006 By Evening Gazette

Once you have made up your mind to go ahead and start up in business, you need to get to grips with the legal requirements.

Setting up your business in the right way keeps costs down. It 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 start-up businesses find that setting up as a sole trader is the best option.

There are several advantages:

* 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.

The disadvantages are relatively few and include:

* You are personally liable for all your business debts.

* 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. But 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 only a few formalities.

Limited company

Advantages of a limited company include:

* Increased 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 include:

* Annual accounts are generally more complicated.

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

* National Insurance payments are higher.

* Other rules can make running a limited company more difficult.

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

Limited liability partnerships

It's possible to set up a limited liability partnership. Despite the name, this is not a partnership. Distinguishing features include:

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

* Members can limit their liability for losses (although personal liability can arise in circumstances similar to those applicable to limited companies).

* 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. There are other filing requirements with strict time limits for compliance.

* 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. This should include:

* The names of the partners and the name of the business, and what it does.

* The date the partnership starts and how long it will last (if not permanently).

* The capital each partner is to contribute.

* How the profits (and losses) are to be shared and how much money each partner can draw from the business.

* How the business is to be run.

* Details of holiday entitlements.

* What to do if partners die, become ill or want to retire or reduce their involvement.

* What the arrangements will be for introducing new partners.

* Once you know what you want, a solicitor will be able to draft a suitable agreement.

Your 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 e.g. Peter Smith could trade as Peter Smith, P 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.

* If you buy an off-the-shelf company you can apply to change the registered name.

* Certain names are not allowed. The name must not be 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.

Starting up in business isn't an easy thing to do as there's a lot you need to know if you want to make your idea into a successful reality and that's where Business Link can help.

Business Link has access to a wide range of expertise and can work with you to help you source the most relevant assistance to ensure you achieve your business goals.

Call Business Link now on 0845 600 9 006 or email info@tees.businesslink.co.uk. Alternatively visit www.businesslink.gov.uk to see how you can get the most from your business.