Starting a new business

Here we respond to the perennial question - "Should I form a Limited Company"

If I had a pound for every time someone said to me “I’m starting a new business and someone said I need to create a limited Company” I would be significantly wealthier than I am. That said, for those embarking on their first business the issue can be somewhat confusing; so let me attempt to dispel some of that confusion by firstly giving a very brief and simplified description of the main business entities and their differences.

  • Sole Trader A person who is the exclusive owner of a business, entitled to keep all profits after tax has been paid but liable for all losses.
  • Partnership A legally constituted form of business between two or more individuals who share management and profits or losses, like sole traders the partners own the business.
  • Limited Company - a private company whose owners are legally responsible for its debts only to the extent of the amount of capital they invested. The shareholders own the business, the directors often called “stewards” manage the business on behalf of the shareholders (although in most small companies the shareholders and directors are one and the same).

Advice for small Businesses

For the majority of small businesses such as tradesman, small retail entities and people delivering various services, those individuals are, in fact, the business. Simply registering with HMRC as a sole trader is all that is required, unless of course they are employing people and or expect to exceed the current VAT threshold of £85,000.

Sole trader and partnerships by there very nature are easily constituted and managed. Liquid assets are easily transferable in and out of the business by the owners providing financial flexibility. In all but extremely complicated circumstances sole trader and partnerships provide an extremely cost effective and flexible solution.

So why form a limited Company? On face value in order to limit personal liability and for tax efficiency. The reality however, is that, in many cases the directors of small limited Companies will often be asked to sign a letter of personal guarantee by suppliers and lending partners thus rendering the limited liability aspect null and void. With regard to tax efficiency, these benefits have been largely eroded by the Treasury over the last few years.

Its also worth bearing in mind that, a limited company, by its very nature is much less flexible than partnerships and sole traders, far more bureaucratic and significantly more expensive when it comes to accountancy fees.

So, in conclusion, I am not saying your business should not be a limited company, however I am saying be aware of the issues and seek advice from a qualified professional. I also recommend that, particularly if you are starting your first business, it is well worth speaking to Business gateway East Lothian

Paul R Hayhoe
November 2018

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