Once you decide you want to start a business, one of the most important things you may now need to think about is what form of business you want to run.
Off course these are some of the issues that you would usually discuss with your accountant if you have one. And as we all know accountants are as exciting as watching paint dry.
So you may find this section of your start-up a bit boring. Nevertheless, you still have to look at it.
Your business idea should usually help you decide what type of company to form. I am going to try to be as simple as I can here. Essentially you will find there are three ways you can start a business.
One way is to start your business as a sole proprietorship. A sole proprietorship an unincorporated business that is owned and run by one individual.
In a sole proprietorship, the individual owner personally liable for all business debts. That means the individual has no business liability protection.
This is important because if the tax authority finds out that you are running a small business and are not paying your taxes, – and they will find out,- you may find yourself in a spot of bother.
Just do the right thing. You may not have to pay any business taxes anyway until you reach certain levels of profit.
Advantages Of A Sole Proprietorship
It is very simple to start. You can start such an operation as early as today. A sole trader business is a good place to begin especially if you are testing your ideas.
You just need to go and buy some product and try to resell them. If you find it`s not really for you then you can try something else. It`s as simple as that. You can start and shut down operations just like that.
So in that sense, it can be the ideal way to begin. If you find the idea is proving viable, and you are growing into a real business, then you may at that stage register your company.
With this type of business, you do not need to file accounts with the company registration authority. So your accountant does not have to produce accounts for that purpose. However, you still need your accountant to do your accounts for you to ascertain your tax liability.
And Has Some Disadvantages Too
As a sole trader, you have no protection against those that you owe money. You see, as the business owner, you would be liable to pay any debts of the business from your own pocket.
This is because there is no separation between your business and you the owner. What your business owes, you owe. It means you may lose your personal property in order to settle your business debts.
Therefore, if you are planning to start a business where the business is likely to accumulate a lot of debts, a limited liability company is best. However, if your operation is likely to deal mostly on a cash basis, then a sole proprietorship is ideal.
Limited Liability Company
A limited liability company is an officially incorporated organization. The biggest and probably most recognizable advantage of registering an LLC is limited liability protection.
That simply means that registration gives protection to the owner and their personal assets. In simple terms, limited liability protection means that the owner`s personal assets cannot be used to pay off an LLC`s debts.
In this case, the law recognizes a clear separation between the owner`s assets and that of the business. In other words, the LLC is its own person.
This type of business is therefore ideal if the start-up is likely to have a lot of borrowings. For instance where a business has a large amount of loan capital.
A Little Advice
Even though owners of an LLC are protected from liability for the debts of the company, – if the business fails to pay the debts and is therefore declared bankrupt, – the owner of that enterprise may be banned from becoming directors of a registered company.
In the UK, you can be disqualified from being a director of a company if an insolvency practitioner or a member of the public report your conduct as being ‘unfit’.
‘Unfit conduct’ includes;
• allowing a company to continue trading when it can’t pay its debts
• not keeping proper company accounting records
• not sending accounts and returns to Companies House
• not paying the tax owed by the company
• using company money or assets for personal benefit
Therefore it is quite important that you understand that limited liability protection should not be abused.
Disadvantages Of A Limited Liability Company
There is a lot of regulatory submissions that limited companies are required to make by law. An LLC, therefore, should engage the services of accountants who will file accurate accounts on their behalf.
The law expects company accounts to be computed and filed on time, and in the correct structure, format, and in accordance with stipulated accounting standards. Owners who fail to adhere to regulations may face prosecution.
These are where there are two or more people who start a business together. These partnerships can operate in a similar fashion as sole traders where they do not need to register as limited liability companies.
However, you can also register your partnership as a limited liability partnership if you so wish. Whichever way you choose to run your partnership, the factors about sole traders and limited liability companies are applicable.
How you decide to form your company at the start depends on you. My advice to you is that if your start-up is likely to be operating mostly on a cash basis with no debts then a simple sole trader start-up should suffice.
However, if you are likely to be doing a lot of borrowing then you may want to register a limited liability company to protect yourself.
Also if you are going to be dealing in a business environment where you will have a lot of corporate clients, then you may want to register a limited company. This will project professionalism on your part and inspire confidence among your clients.
Point To Note
Even though registering a limited liability company provides the owner with protection from business creditors, most creditors will demand the owner`s personal guarantees before they deal with your business.
If you provide these guarantees you may find yourself personally liable for your limited company`s debts. In short, you lose your personal protection against your business debts if you sign a personal guarantee.
I hope you will find this information very helpful to you for your purposes.
All the best.