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6th July 2012

THINKING OF SETTING UP YOUR OWN BUSINESS........

This is a whistle-stop guide to some different structures....and also our advice!

Sole trader

Simply the business and the owner are the same person; there is no legal distinction. The owner receives all of the profits, owns all of the assets and makes all of the decisions. The quickest, easiest and cheapest form. However the sole trader has unlimited liability; they are personally responsible for all of the business debts. All of your personal assets are on the line.

Partnership

Partnership can be set up by two or more people usually using a Partnership Contract This sets out the legal relationship between the partners; how risks and responsibilities are shared; how profits (and losses) are shared etc. Like a sole trader, a partnership is a relatively simple and flexible business structure. Again however there is unlimited liability. Each of the partners personal assets are on the line for all of the partnership debts and what is worse is that there is the potential for partner A to incur a debt for the business without partner B's knowledge but partner B will still be liable.

Limited Company

A limited company has slightly more formality in set up and administration but nothing to be daunted by. Companies are governed by the Companies Acts and directors have significant legal duties all of which we can explain. However, and crucially, the main difference between companies and sole traders/partnerships is that the shareholders liability is limited to the money that they have invested. Only the company's assets are on the line and so long as the directors behave honestly, even if the company unfortunately fails, their personal assets are protected (unless of course they have agreed to give a personal guarantee to anyone).

Of course there is more that you need to understand, and we can explain everything in detail, but fundamentally our advice is that sole trader or partnership is rarely best and almost always a limited company structure should be chosen. The limited company structure was created in the 19th century specifically to enable people to take entrepreneurial risk without the fear of losing everything if the business fails. The structure enabled the economy to expand, creating jobs, innovation and growth. This is just as relevant today, isn't it?

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