Choosing the right legal structure for your start-up

You have a business plan, done your market research and the bank manager has given you the nod. But have you considered the right legal structure for your new business? We’ll explore the key differences between sole trader, partnership, limited liability partnership, and private limited company, to give your killer start-up idea the best chance of success.

Sole Trader In a nutshell: Becoming a sole trader is the simplest option available to you. All you have to do is register with HMRC (before the deadline), name your business, and away you go. There’s little paperwork to complete, just your annual tax return. And despite the name, you can even employ staff and grow your team as you see fit. There isn’t even an obligation to publish your annual finances. But…And it’s a big but. There are risks. As a sole trader, the law sees you and your business as a single entity. Meaning you are solely responsible for the financial situation of the business. Put simply, if the business goes into debt, your income, car, home, and possessions are all at risk.

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Partnership In a nutshell: If you like the idea of setting up as a sole trader but there are multiple people involved, a partnership is a logical choice. It’s essentially a group of sole traders working together as partners. All self-employed, and all liable for the business. It’s a popular choice for people who already have a strong working relationship and want to hit the ground running. But as with being a sole trader, there are important things to consider. If relationships sour and one person decides to disappear with the cash, your assets are still at risk. Before you make a decision, it’s highly recommended you draw up a partnership agreement. This document outlines ownership, liabilities, and what happens if things don’t go to plan.

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Limited Liability Partnership In a nutshell: Sitting somewhere between a partnership and a fully-fledged limited company, a limited liability partnership is a popular alternative to a traditional partnership if the risks are enough to put you off. An LLP shares the same characteristics as a traditional partnership, with the added protection that comes with being a separate entity. In other words, if debts are owed, the only assets at risk are those of the business and your collective investment. This makes LLP’s an attractive option for start-ups with a small team who share an even piece of the pie. If your vision is to employ lots of people whose total salary will be more than the owners’, a private limited company may be a better bet.

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Private Limited Company In a nutshell: Similar to an LLP, a private limited company is a separate entity to its owners. A limited company is the most common incorporated business structure. It requires at least one director to set up, and at least one shareholder. You may also sell shares privately to raise investment. Choosing between an LLP and a private limited company will depend entirely on your business and your plans for the future. To start a limited company you must first register at Companies House. Before wading through a considerable amount of legal documentation. The corporation tax, public accounts, and compliance documentation alone are enough to tempt many start-ups down alternative routes. With that said, you’ll pay less tax and National Insurance than a sole trader or partnership. That is if you recruit an experienced accountant who can help get your start-up off the ground.

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To summarise: Given all the options available to you, it’s obvious that what works for you might not work for another. On top of professional legal advice, the best guidance you can receive is that of somebody who has walked the same path before you. Your decision will ultimately boil down to whether you have the confidence and safety nets to go it alone, or whether protecting your assets and attracting external investment is more suitable for your start-up strategy.   No matter what legal structure you opt for, workinc makes it easier than ever to set up a new business. Our co-working spaces offer flexible memberships with 24/7 access, unlimited Wi-Fi and daily cleaning with no hidden surprises. Ready to join like-minded people who reject the 9 to 5 grind? Sign up to our mailing list and be the first to learn about workinc locations opening near you.

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