When setting up a small business or, indeed, once you’re up and running, the legal nature of your business should be given some thought in order to ensure that your interests and those of the business are adequately protected. There are various options to consider, three of which are set out and discussed in this article.
When starting out in business, a sole entrepreneur seeking to take the reins and going it alone with his or her idea for small business will usually set up and start out on his/her endeavours as a sole trader or self employed person. The advantage of running your business this way is that it is a very simple matter of registering as such with the tax and social insurance departments before setting out on your new business. As a self employed person, you will be required to file tax returns along with accounts prepared by the business’s accountant in order that the tax authorities may make an assessment of the taxes payable by the business.
An entrepreneur trading as a sole trader might also choose to register a business name instead of trading in his/her own name. It may well be the case that trading as Joe Bloggs the plumber might be adequate enough, but registering a business name, say, ‘When Water Goes Wrong,’ might prove a better opportunity for marketing and easier to remember for your prospective clients. Registering a business name gives you the opportunity to identify and promote the services you provide in a way your simple name might not. It provides you with a separate and distinct identity, but nothing more than that.
Trading as a sole trader/self employed person, you are personally liable for the debts and obligations arising as a result of your business. Where debts need to be paid, it’ll be the entrepreneur himself who is pursued by the creditors and any legal process issued for recovery of debts or payment of damages for negligence or any other wrongdoing will be against the person his/herself. There is no limit to the liability that might be personally incurred by the sole trader, a reason why considering the next two options might be a really good idea!
Where a business is established by two or more partners, the resultant partnership attracts its own legal status and works in the following way. Partners are each jointly and severally liable for the debts and obligations of a partnership. What this means in practice is that all partners are, at once, liable for the full amount of the debt owing and cannot therefore, in the case of one of the partnership as a whole being in difficulty and one of the partners being unable to meet his/her obligations, the debt will be the responsibility of the remaining partner(s) as to 100% of the amount owed and not just the proportion of a particular partner’s interest in the business. As with sole trading, the partners are personally liable and, although technically each partner is liable for the total debts, the practical reality is that the business’s expenses are shared between two or more people. As with sole trading, the partnership may also register a business name in a similar way. Sole trading and partnership therefore share the trait that its members have unlimited personal liability for the debts and obligations of the business.
The simplest and most popular way to cure this ‘deficiency’ is for the business owner/partners to incorporate a company limited by shares to own the business. A company limited by shares is said to be a separate legal entity, with a legal identity of its own distinct from its members, allowing it to sue or be sued in its own right. The owners of the company are its shareholders, shareholding which can be designed and implemented in many ways to accurately reflect the ownership of the business. The key advantage to the establishment of a company for a small business is the limited liability that comes with it. They’re not called limited companies for nothing! The liability of a shareholder in a company is limited to the extent of the value of the shareholder’s shareholding in the company and nothing else. As an illustration of the point, Mr J Bloggs could be a 100% owner of J Bloggs Company Limited with a shareholding of £100 and therefore limit, under normal circumstances, his liability to £100.
The fact of the company’s separate legal entity can be used in many advantageous ways, too many to set out here. Suffice to say that the establishment of a company offers a large number of advantages over a simple sole trading operation/partnership for a relatively insignificant outlay. Companies can be set up in a matter of days, sometimes even in the same day, through the use of what are known as ‘shelf’ companies. These ready-made and incorporated companies sit, quite literally, on the shelf and can be assigned to a new client in a matter of hours to a day. If the name’s not right, change it. If you don’t want to change the name, simply register a business name which the company will use and keep the original company name. J Bloggs’s business could therefore still be ‘When Water Goes Wrong,’ although technically it would be referred to as ‘J Bloggs Company Limited trading as When Water Goes Wrong.’ As is clear from this example, there is no reason why a sole trader cannot seamlessly go from sole trading to incorporating a company without sacrificing continuity of the business name.