Starting your own business comes with so many complex decisions, one of the first is figuring out what corporate structure to use. In most instances, you’ll either be considered a Sole Trader, a Partnership or a Company. Each structure has its benefits and drawbacks, so it is wise to seek advice from a legal professional before getting set up. Your lawyer will be able to answer your questions and help you understand what will work best for you and your business goals.
Becoming a sole trader is the cheapest and easiest option, usually selected by people just starting out in business, as setup is simple and low cost. As a sole trader, you control the business and get all the profits. However, you are personally liable for all debts, which may put your personal assets at risk. Additionally, obtaining capital from loans or investment can be more challenging.
Partnerships are where two or more people or organisations come together to forma business, with an agreement as to how they will share work, costs, profits and debts. This allows all parties to focus on their strengths and share the load of business operations. Like a sole trader, the business owners are personally liable for the business debts, and personal assets are still at risk. Additionally, you may end up liable for your partner’s business debts.
Limited Liability Company (Company)
Structuring as a company, while more complex to set up and run, offers shareholders much more protection from personal liability for business debts. This protection comes from a concept known as ‘the corporate veil.’ This is the principle that a company is a separate legal entity to its shareholders.
If a company is unable to pay its debts, and is put into liquidation, the shareholders are only liable for those debts if:
The corporate veil allows a company to take reasonable commercial risks without directly exposing shareholders to those risks and the consequences thereof. However, the corporate veil doesn’t necessarily provide protection in the case of reckless or fraudulent activity. In these cases the corporate veil can be either lifted or pierced by the courts. If this happens, the director(s) will no longer be protected from personal liability.
A limited liability company has other key benefits, namely continuity and transferability. A company will continue to exist until it is deregistered; meaning changes in ownership or management have little impact. In contrast, a sole trader business relies on the existence and continuation of trade of the business owner. Similarly, a partnership will usually need to be dissolved in the case of the death or retirement of one of the partners.
A company is also much easier to transfer ownership of than a sole trader or partnership. Shareholders can, subject to the company’s constitution, sell or otherwise dispose of their shares as they wish. A partnership would need to be ended and a new one formed to transfer the business.
What’s right for you?
While a business’s structure can be changed down the line, getting it right from the start will set you up for success. The choice of structure will rely on many factors including business goals, desire for work-life balance, plans to sell the business in the future, what investments you need and how quickly you want to get up and running.
Wakefields offers a range of business services from experienced commercial lawyers to help you get it right the first time. We will take the complexity out of your start-up and get you there faster so you can concentrate on success.
For a free, no obligation consultation on what your goals are and how we can help you reach them, give us a call on 04 970 3600 or email firstname.lastname@example.org today.