So you are setting up in business or have grown a business as a Sole Trader and now want to consider operating as a Partnership or as a Limited Company – which is best for you?
You need to be clear as to the key characteristics of these business models before you decide which your best option is.
What is a Limited Liability Company?
A Company is a separate entity – a legal person in its own right, quite separate from those
- who own it – the Shareholders
- who run it – the Directors
So this Company you have created can itself
- own property
- employ people
- act as Director or Secretary of another Company
- enter into Contracts
- issue Proceedings in the Courts
- be sued in its own name
A private Company may be limited by shares or by guarantee – a commitment to contribute a given sum if the Company is wound up.
So as a member of a Limited Company you cannot be liable (unless you have for example given a Personal Guarantee) for the debts of the Company to any greater extent than the amount you paid or agreed to pay for your stake in the Company This amount is usually determined by the value of the Company Shares so if a company has issued 100 ordinary Shares of £1 each and they are fully paid, the Shareholders will NOT have to pay any more.
Why have a Limited Liability Company?
Operating as a Limited Company is becoming more popular. You may want to consider these factors when making your decision
- limited liability means that the Company is sued and not you as an individual – this applies to Employment Tribunal claims as well as general Litigation. Claims that would normally be the personal responsibility of Partners or Sole Traders are the responsibility of the Company.
- you can appoint nominee Company Officers and Shareholders so no-one need ever know who is running the Company
- protection for the Company name – Companies House will not register another name that is the same as the one you have chosen. If another name is registered and is considered to be ‘too like’ your Company you can lodge an objection with Companies House who can direct the new Company to change its name
- some people see a Limited Company as having more credibility in the market place
- you may find it easier to raise capital and loans for the business but even then you may need some completed Trading Accounts
- there may be Tax advantages by your drawing some income from the Company at a lower Tax rate while leaving some in the Company to increase Cash available for the business and enjoy a lower Tax liability on that sum
You normally associate Partnerships with Accountants and Solicitors where individuals involved wish to preserve a degree of independence but also share the cost of facilities such as
- insurance cover
- secretarial services
However even those involved in Professional Services are now more and more limiting their individual liability in some way. Many family run businesses have traditionally operated as a Partnership so that working family members are Partners and therefore co-owners of the business and its assets.
- The Limited Partnership Act 1907 can provide protection for what are called Limited Partners.
- Limited Partners contribute capital but take NO active part in running the business
- General Partners may contribute capital and also work in, or manage the business
- Limited Partners are NOT liable for business debts beyond the amount of capital they have already contributed
- General Partners are completely responsible for all debts of the business
Disadvantages of being a Partner
- Generally all Partners are ‘jointly and severally’ liable for the debts of the business. This means that if one or more Partners incurred business liabilities that could not be paid then EVERY individual Partner could be liable for the whole debt. It is entirely at the discretion of the Creditor(s) who they decide to pursue for the debt
- This problem has been eased by the Limited Liability Partnership Act 2000. If you register the Partnership with Companies House you effectively limit the liability of each Partner so that their personal assets are beyond the reach of business creditors
- All Partners are assumed to have authority to act as agents of the Partnership and their actions are binding on all the other Partners
- A Partnership Deed will be required to regulate how the business is run, what happens when a Partner leaves etc
- Partners are all taxed on their proportion of the Partnership profits and like a sole trader could pay the maximum rate whatever that is at the relevant time
So which business model is best for you very much depends on what you have in mind but we can advise you on all the issues you need to take into account.