Which legal structure is best for you?

Sep 28 2009 by Jill Lee, The Journal

IF you want to get your business off on a proper footing with HM Revenue and Customs (HMRC) and other authorities, it is important to make sure you have the right legal structures in place that are best suited to the way you do business.

This is a crucial part of setting up any new business as it will affect a number of areas, including the tax and National Insurance you pay, the records and accounts that you have to keep and your financial liability if the business runs into trouble. It may also affect pension payments, the ways your business can raise money and the way management decisions are made about the business.

The choice you make could also affect your eventual exit from the business. If there is more than one person starting the business then documents such as partnership or shareholder agreements will need to address what would happen if one partner wanted to exit the business due to ill health or for other reasons.

There are several structures to choose from, and an accountant or solicitor will be able to advise on the best option for your individual circumstances. Deciding on your business structure is an important step – it could affect the degree of financial risk you take on, the control you retain over the business and the level of day-to-day administration involved.

Setting up as a sole trader is probably the simplest option. Here, accounts are straightforward and profits belong to you, however, you are also personally liable for any debt.

If you decide to set up a limited liability company, including private limited companies, you must comply with strict regulations, but you can raise money through shareholders. In this situation, the company's finances are separate from the personal finances of the owners.

A partnership may be another option to consider. Here, two or more people share the responsibilities of running the business and take equal share of both profits and debts. A limited liability partnership is similar to a partnership, but liability is limited to what each partner has invested and the personal guarantees that have been given.

Other legal structures to consider include franchises, social enterprises and co-operatives. You should research each option carefully, and consider taking legal advice.

Business Link has a guide available at www.businesslink.gov.uk/northeast where you can go to find out more legal structures and choose the best one for you and your business.

For more information on Business Link see www.businesslink.gov.uk/northeast or call (0845) 6009 006.

By Jill Lee of Business Link