Each potential business structure you may choose for setting up your business has advantages and disadvantages. Choosing the right legal entity structure is a very important and significant decision. Getting it wrong can result in catastrophic personal implications, so it is worth taking the time to consider all the options, which include :-
Setting up a limited company – the advantages and disadvantages
Advantages include :-
- Personal liability (except where you are a director in clear breach of company law such as continuing to trade when insolvent) is limited to any sum of money you put into the business.
- As you business grows you can continue to ringfence downside by setting up subsidiary companies and ringfencing certain assets and spreading business risk
- The impression given to other businesses may be better than as a sole trader although this may be a perception issue more than any underlying reality.
- There may be tax mitigation benefits for you personally.
Disadvantages may include :-
- A larger amount of administration in corporate paperwork and filing. You may need to pay more money to accountant and/or solicitors as your company grows.
- A greater degree of formality. You will need to at least be aware of the basics of company law and procedures for calling meetings and dealing with director or shareholder decisions.
- Initial set up costs may be higher than other business entities
Going into Partnership – the advantages and disadvantages
Be aware that there are now 2 forms of partnership, one which has unlimited personal liability and a new form, which is half way house between partnership and a limited company, known as a limited liability partnership (LLP). With an LLP structure personal liability of the partners is limited as with a company except that the partners remain liable for paying taxes of the partnership.
The major disadvantages of partnership on an unlimited basis are the prospect of unlimited personal liability for the partnership’s debts, the fact that you are on the face of it equally liable for those debts even if your partner or partners incurred them without your knowledge or were at fault and complications regarding control of the partnership, exit routes and dealing with situations such as illness, retirement or death of a partner.
Setting up as sole trader – potential advantages and disadvantages
Being the sole owner of the business is the least regulated way to do business but this comes with some pretty significant risks. You are the business and are responsible financially and legally in your own right for any liabilities or actions of the business you operate. At worst, this can result in bankruptcy if your business does not pay it’s liabilities. If your busines is late in paying debts, your personal credit rating may be effected. There is a general lack of defensive options if things go wrong, whereas with limited companies there are a range of options such as setting up more than 1 company as described above and even with insolvency, there are more options, such as administration, which can result in a business surviving or in being able to resurrect parts of it.