Press Coverage - TelegraphOriginally posted at http://www.telegraph.co.uk/business/sme-home/how-to-incorporate-your-business/
Sole trader, limited company or partnership? Discover the pros and cons of each to help you make the right decision for your new business
Incorporating your first business can be tricky if you are not clued up on the jargon and the rules. There are plenty of online guides claiming that they can help you through these crucial first steps of registering a business at Companies House but few actually tackle the nuts and bolts, such as: How many shares do you need to create when you incorporate your business at Companies House?
Why might you want to be a limited liability partnership instead of a limited company?
I caught up with Carl Reader, author of The Startup Coach and boss of accountancy firm d&t, to find out exactly what you need to know in these early stages.
He says that the first thing to consider is whether you want to be a sole trader or a limited company. “As a sole trader, you are your business so you are liable for any business debts,” Mr Reader says.
“Because you are unincorporated, there are no documents to file at Companies House and there are no publicly available documents on your business. The only level of administration at this level is filing a tax return with HMRC.”
A limited company is a separate legal entity, which has its own debt and expenses. You are required to file annual accounts and annual returns and notify Companies House of any changes in the officers of the company. There are penalties to pay if you miss deadlines.
There is more red tape but there are also benefits. “If the business is dragged down by debt, the directors won’t be, unless they have acted fraudulently,” Mr Reader says. “Limited companies are also seen as stronger businesses to deal with by suppliers.” He adds: “If you want to raise venture capital, you must be a limited company.”
There are other options. A partnership is an extension of a sole trader – typically when Mr and Mrs X run the business together, for example. They will be jointly liable for any business debts.
An incorporated version of this – the limited liability partnership (LLP) – can be advantageous if you want to be flexible about how profits are distributed. “With a limited company, you’re tied to the structure of the share capital,” says Mr Reader. “The dividend payments are weighted to the ownership of the business.”
When registering a limited company with Companies House, you will need to allocate shares and to name your company directors. You can be the sole company director but it is worth naming someone else you trust as company secretary.
“If the business is doing well and you die suddenly, this will make dealing with assets easier,” says Mr Reader. You only need to create a single share if you are the only owner. Mr Reader recommends stating the value of the share as an easy round number: say £100. This is money that you technically owe the business but you will only pay this if the company goes bust.
You will need to give your address and this will be on public record, but you can use your accountancy firm or law firm address in place of your home address if you do not have a registered office yet. If you are a Scottish business, you are required to have a Scottish registered office.
Ordinary shares are the simplest kind of share capital to issue – this means that each share is ranked as equivalent to each other. Class A or B shares can vary on voting rights or dividend payments. If you are thinking of creating different classes, seek professional advice.