In the first entry of our ‘How to Grow Your Business’ blog series, Robert Flint, Corporate and Commercial Lawyer at Carbon Law Partners outlines the different routes available when establishing your business.
Starting A Business? Get A Car…
Or a bike, or a horse. Or maybe you could just walk: there’s less paperwork and it’s cheaper, but you’ll get there slower.
I talk, of course, in a dangerously over-extended metaphor, because when you start your business you’ll need to know which “vehicle” to use.
So, whether you’re setting up as a sole-trader, partnership, company or a limited liability partnership, it’s important to get it right – for protecting your existing interests, for scaling up and for paying the right amount of tax. Let’s take a look at some of the options.
SOLE-TRADER.
An easy stroll in the park, but you’re vulnerable to bad weather. To get going:
- You only pay tax as an individual: just register with HMRC for self-assessment as a sole-trader and you can get going.
- You pay income tax at the end of the year and capital gains tax on sale of assets (subject to any available reliefs).
- Given the tax advantages of companies, you may well pay more tax in the long run.
- You’re also personally liable if you get sued, so all of your other assets such as a house are potentially at risk
- There’s no need to publish your accounts online
- And fairly obviously, there can only be one of you. Otherwise, you’ll be looking at a partnership…
PARTNERSHIP.
Like going for a walk with a friend. This is the old-fashioned partnership where each partner co-owns the assets of the company.
- This offers many of the same advantages and disadvantages of a sole-trader and is common in traditional high street professional firms
- You’ll need to register as partners with HMRC and each partner will need to submit their own tax returns in addition to the tax return of the partnership
- There’s no need for any formal written agreement, though this is strongly recommended to avoid issues further down the line
COMPANY.
The work-horse of the economy companies offer the key advantage of being able to scale up easily and in a way that your creditors, clients and investors can trust. You can’t float a sole-trader or a partnership on the stock market, after all.
- Your company pays corporation tax and you pay income tax, but a company may well offer tax advantages overall.
- You may need to instruct accountants to deal with expenses, corporation tax, PAYE and VAT unless you feel confident in dealing with these yourself.
- It’s also important to note that if your company makes a loss, this cannot be offset against your other personal income.
- The company is a separate legal entity from you as shareholder or director, so your liability is limited to whatever assets you have put into the company. The quid pro quo for limited liability is that your accounts are public (as your creditors need to know you’re going to be able to pay back their money).
- Before lending to smaller companies, however, banks usually also require personal guarantees which circumvent this limited liability.
- If you’re a director you’ll also have legal duties to the company and society at large, carrying potentially criminal penalties.
There are lots of different types of companies from Private Limited Companies, Companies Limited by Guarantee, Public Limited Companies, Unlimited Companies and Companies listed on the stock exchange.
LIMITED LIABILITY PARTNERSHIP.
A specialised vehicle, not great in all road conditions. In the year when Michael Schumacher won the Formula One World Championship with Ferrari for the first time, the UK Parliament was having fun engineering the Limited Liability Partnership.
And to be fair to British politicians, if you’re thinking of setting up a partnership, an LLP could be a great alternative.
- This relatively new structure combines tax treatment of a partnership (i.e. the partners are only taxed as individuals) with the limited liability and the extensive filing and disclosure requirements of a company.
- This is great for professional or investment partnerships because it is incredibly flexible (there are few formal constitutional requirements) and the constitution documents of the LLP are private.
- But an LLP is less useful for scaling up a business, as equity investors in the business will want to be issued shares, which LLPs obviously cannot do.
- As the name suggests (and unlike a company), there need to be at least two partners to set one up.
YOU CAN ALWAYS TRADE VEHICLES.
You can convert from a sole trader or partnership to a company, or the other way around. This will involve transferring the assets as “a going concern” to the company in return for shares, using an asset transfer agreement.
- The key issue to be aware of on conversion is tax liability
- If a chargeable gain for the purposes of capital gains tax arises, certain reliefs may be available such as incorporation relief, hold-over relief or entrepreneurs’ relief
- You may also have to consider SDLT (if you’re transferring land) and the difference in your personal tax situation if you become an employee (where national insurance will become payable and expenses/benefits are dealt with differently)
- Assuming a business is transferred as a “going concern”, no VAT is payable on the assets transferred
CARBON IS A GREAT TRAVELLING COMPANION.
It makes sense to get this right from the start. At Carbon Law Partners, we’ll work together to establish your objectives, talk you through the different options and guide you through the main considerations.
If you’d like to get in touch about your business, please email Robert Flint for a free initial consultation.
Carbon’s Commercial Team
- Natalie Murray, Partner – natalie.murray@carbonlawpartners.com
- Viviana Mucharraz, Partner – viviana.mucharraz@carbonlawpartners.com
- Robert Flint, Partner – robert.flint@carbonlawpartners.com
How to Grow Your Business is a blog series intended to help with some of the common questions you may have on setting up, growing and developing your business, from commercial agreements to intellectual property and from hiring employees to IPO. It is not legal advice.