Structuring Your Business
Should I do business as a sole trader, partnership or limited company?
What are the publicity requirements for limited companies?
I have a business partner, should we have a partnership agreement?
What is the difference between Directors and Shareholders?
I run a limited company, what are the limitations on its activities?
I own shares in a company, do I need a shareholders agreement?
How can I plan my business so that I can retire comfortably?
Can an employee become self-employed for tax reasons?
What constitutes a business?
Strictly speaking, any means of earning an income that is not automatically taxed (for example: investments or working as an employee) constitutes running a business. Many people may consider that hobby work is not a business, but the tax man would not agree, if it is paid work. For instance: baby-sitting, selling produce grown in your garden, gardening, washing cars, house cleaning, dog walking, or even playing the church organ can all be treated as business activities. The tax man is unlikely to be interested if it is very small scale but otherwise you should treat it as a business and consider an appropriate structure.
Please also see Can an employee become self-employed for tax reasons?
Should I do business as a sole trader, partnership or limited company?
The simplest way of doing business is as a sole trader with or without employees. If the business is owned by more than one person, the owners could be in partnership. An alternative to either is to trade through a limited company.
There are therefore three main distinct business structures
- Sole Trader
- Partnership (sometimes called a firm)
- Limited Company - either a private company or a PLC (Public Limited Company)
Sole traders are always personally liable for their (and therefore for their business's) debts and mistakes. Likewise for partnerships, but a major additional drawback of partnerships is that any partner can commit the whole firm to obligations, which are then borne by each partner personally - if you are planning on a partnership, you need to be very sure that your partners are trustworthy!
Trading through a limited company offers protection against personal liability for debts and other liabilities incurred in normal trading, but using a limited company will not protect you against your own dishonesty.
The most important consideration in choosing how to structure your business is normally its tax efficiency. The best person to discuss this aspect with will be a good accountant. It may make sense for a sole trader to set up a partnership with a member of the family or for a sole trader or partnership to form a limited company.
What are the publicity requirements for limited companies?
Certain information about every limited company must be given on the company's paperwork (letterheads, invoices, compliments slips, order forms, etc), or displayed at the company's Registered Office and places of business.
Company name
The company name must be shown clearly on -
- the outside of the company's Registered Office
- the outside of every place of business of the company
- all company paperwork
Paperwork
As well as showing the company name, all company paperwork must show -
- the place of registration (e.g. England)
- the registered number (as shown on the Certificate of Incorporation)
- the Registered Office address
Also, if any reference is made to share capital, it must be to paid up share capital.
Directors names
It is not necessary to list directors' names on company paperwork. However, if any directors' names are shown, all of them must be shown, giving the forenames (or initials) and surnames.
I have a business partner, should we have a partnership agreement?
In the case of a husband and wife partnership, a partnership agreement is of very little value as any serious disagreement is likely to end up in the divorce courts. Despite this, a simple written agreement can be useful in negotiations with the tax man.
In the case of any other partnership, a written agreement is of huge value - even if it is never actually referred to in practice. The fact that it exists can prevent misunderstandings arising. If there is ever a misunderstanding or difference of opinion, a well-drawn partnership agreement should offer a way of resolving it. If the problem is so fundamental that it can not be resolved, the partnership agreement will stipulate how a partner can resign (or be expelled) or how the partnership can be dissolved.
In the absence of a written agreement, the Partnership Act of 1874 will apply. This Act gives all partners have equal rights and allows any partner to wind up the business, for any reason - even a whim.
If you want me to draft a partnership agreement for you, please download, complete and return the Partnership Agreement Instructions. I will then contact you to discuss your needs, and to let you have an estimate of the likely legal costs involved.
What is the difference between Directors and Shareholders?
A sole trader both owns and runs the business. Similarly, partners in a firm are usually both owners and managers though some firms have sleeping partners (who own an interest but do not take part in the day to day business) and partners can delegate management functions to non-partners.
A company must have directors (who run the business) and shareholders (who own the company). The same people may be both directors and shareholders but their rights and responsibilities depend on which hat they are wearing at the time.
I run a limited company, what are the limitations on its activities?
Most modern companies are general commercial companies and can conduct any lawful profit-making activity. All the company's' activities must be intended to generate profits. Even 'non-profit making' companies, such as charities, should in fact make a profit, though this would not be distributed to shareholders.
The directors of a company must not allow it to become involved in:
- Wrongful trading: trading when the director(s) knew or should have known that there was no reasonable prospect of the company avoiding insolvent liquidation - in those circumstances, the director(s) should take prompt steps to wind up the company
- Fraudulent trading: trading with the intention of defrauding creditors or for any other fraudulent purpose
Directors found to have permitted wrongful or fraudulent trading can be made personally liable for all or part of the company's debts, and may be disqualified from acting as a director in future.
I own shares in a company, do I need a shareholders agreement?
If you have shares simply as an investment in a quoted company, a shareholders agreement is inappropriate. Otherwise, a shareholders agreement can protect your interests if you are a non-majority shareholder or a shareholder but not a director.
Shareholders' agreements should be tailored to suit individual companies' requirements and can cover a wide range of circumstances. In particular, they can stipulate the majority vote needed to make different types of decisions, restrict directors' authority and provide mechanisms requiring outgoing shareholders to sell their shares to other shareholders instead of to outsiders and requiring those other shareholders to pay a fair price.
If you want me to draft a shareholders' agreement for you, please download, complete and return the Shareholders' Agreement Instruction. I will then contact you to discuss your needs, and to let you have an estimate of the likely legal costs involved
How can I plan my business so that I can retire comfortably?
Many business people want to build their businesses to sell them and retire on the proceeds. Not all businesses are suitable for this purpose - if the business depends on personal involvement by one or more individuals, it can not easily be sold; an option is to sell with an interim consultancy arrangement, during which the goodwill is gradually transferred.
One of the advantages of a partnership can be that retiring partners may be replaced by new partners, who may be employees or outsiders, or may be bought out by other existing partners (which can covered in a partnership agreement).
If the business is a company, a choice must be made between selling the shares in the company and selling the assets of the company, the decision will often depend on the tax implications.
Ideally you should plan your exit when you plan your entrance. Structure your business at the outset to maximise the return and minimise the tax when you sell.
Can an employee become self-employed for tax reasons?
This is a complex issue to download a pdf file click here (16k)
Important Disclaimer
These notes are a general statement of the law - there may be errors or omissions. I do not accept responsibility for any loss resulting from reliance on them - please see my full disclaimer.
