New Year, new business venture? Considering the types of entity for your firm

There are many different forms which a business can take.

If you are considering starting a new business this year, before you start trading, it is important to obtain both legal and accountancy advice to discuss which trading vehicle would best suit the needs of both the business and its owners.

Are you going to be a sole trader, or trade as a partnership, private limited company or Limited Liability Partnership?

Joe Creasor, a solicitor in the company commercial team at Wake Smith, looks at the different entities and how vital it is to have all the correct constitutional and commercial documents in place.

This article covers:

• Sole Traders
• Partnerships
• Private Limited Companies
• Limited Liability Partnerships (LLP)
• Your next move and how Wake Smith Solicitors can help?

Sole Traders

A sole trader is where one individual owns and operates a business and there is no legal distinction between the owner and their business.

All profits and all losses, subject to taxation specific to the business, and all of the assets and liabilities of the business belong to the owner. There is no limit on the owner’s liability for debts of the business.

One benefit of being a sole trader is there are far less administrative requirements than for other trading vehicles, including no need to file annual accounts at Companies House, and if you wish to cease trading, the process is much simpler than for other trading vehicles.

However, as the sole trader is normally wholly liable for all of the debts of the business, this presents its own challenges.

 

Partnerships

A Partnership arises where two or more persons carry on business in common with a view to making a profit, regardless of whether the persons intend to carry on as a partnership.

Partnerships are governed in the UK by the Partnership Act 1890.

A partnership is not a separate legal entity so each partner equally shares in the profits and losses of the business, unless there is an agreement to the contrary, such as a Partnership Agreement. The partners, as a whole, generally have unlimited liability.

Business owners often overlook the fact that unless there is a Partnership Agreement in place, the default position under the Partnership Act 1890 provides little to no protection for partners.

For example, without a Partnership Agreement, all partners will share equally in capital and profits, regardless of their initial capital contributions to the partnership, and each partner must contribute equally to losses.

If there is no Partnership Agreement in place then:

• a partner has no right to retire from the partnership and if they do exit, then technically this would have the effect of dissolving the whole partnership and the partnership should cease trading;
• there is no power to remove a partner from the partnership; and
• the death of any partner will lead to the automatic dissolution of the partnership. In light of these factors, it is important to prepare a Partnership Agreement to future proof the business of the partnership.

Some business owners favour a partnership as accounts do not need to be filed at Companies House, which is a public record. However, it is important to consider and be advised on taxation and personal liability implications before starting to trade.

Private Limited Companies

A Private Limited Company is a company owned by its members and managed by its directors.

It is a separate legal entity from its members who benefit from limited liability for the debts of the Company.

A private limited company can be limited by shares, where the shareholder liability is limited to the amount unpaid on the shares they hold, or limited by guarantee where the members' liability is limited to the amount they have agreed to contribute to the company's assets if it is wound up.

It is not a public company, so not allowed to offer its shares to the general public.

To ensure the company is set to operate in the manner it wants, it is vital to have a suitable set of Articles of Association.

These are one of its key constitutional documents and form a binding contract between the company and the members.

If a company has more than one shareholder, it is also important for there to be a Shareholders’ Agreement in place to sufficiently determine how to approach commercially sensitive matters such as:

• how shares can be transferred
• how to resolve conflict; and
• dividend entitlement.

This entity is often the favoured trading vehicle of business owners due to the principle of limited liability (there are circumstances where liability is not limited), however it is important to be aware of the filing obligations and deadlines at Companies House after incorporating a company.

Limited Liability Partnerships (LLP)

Limited Liability Partnerships (LLP) are a hybrid form of business entity: they are neither a partnership nor a company.

Like a company, an LLP is a separate legal entity and an LLP member's liability is limited, however, like a partnership, the LLP is run by the individual members and is taxed like a partnership.

An LLP is not required to have formal constitutional documents, however, unless there is a formal LLP Agreement to govern how it should be managed and operate, there could be disputes and uncertainty.

Regulations relating to LLPs are fairly narrow and therefore to rely on these could lead to uncertainty further down the line in the LLP’s life. We recommend if creating a new LLP, you enter into an LLP Agreement.

As with a company, there are important filing obligations and deadlines at Companies House to be aware of once the LLP has been incorporated.

Your next move, and how Wake Smith Solicitors can help?

If you are thinking about starting a new business, it is vital to carefully consider the best trading vehicle before you start.

Once you have established what form that will be, the next step is to bring the trading vehicle into existence by incorporating at Companies House, if that is required of the chosen trading vehicle.

Wake Smith Solicitors is experienced in advising all types of businesses at all stages. If you would like to discuss this further, please contact company commercial team on 0114 226 6660.

Find out more about our Company Commercial law services

Re-published 10/10/2024