A question often asked by individuals starting up new business and also recently by property investors alike. Whilst every situation is different, there are a few rules of thumb that can help in deciding which entity to trade as. This article briefly discusses the most important considerations to help you decide whether or not to incorporate your business.
Neither Sole traders nor partnerships are required to register their business with Companies House although there are HMRC registration requirements. A company must be registered with Companies House. This is a relatively simple process which Bright Solicitors is able to assist with.
In a non-incorporated business the individuals are the legal owners of any assets of the business including property, vehicles, stock and also IP rights. In a limited company the shareholders are the effective owners of the company and the company, not the shareholders, own the assets.
Presence & Attraction
An unincorporated business has no particular corporate identity save for its non-registered trading name. Because of this, it can often be more difficult to secure extra borrowing or 3rd party investment. Conversely, a limited company often carries a corporate image which can have a number of benefits. Companies are often perceived as bigger businesses which may attract more customers, although this may not be as significant to property investment companies. A company will have a share capital, from which shares may be issued to investors. Different types of shares may be issued for different purposes including non-voting shares.
A sole trader is personally liable for the business’s debts and individuals trading as a partnership shall be jointly and severally liable for business debt. Conversely if a company cannot pay its debts it is not the shareholders or directors who are responsible, so long as they have not been negligent in their duties as a director nor provided a personal guarantee on any borrowing.
Having incorporated a company at Companies House the company name is automatically protected so that no other company may be allowed to use it. There are no requirements for a sole trader or partnership to register a business or trading name however if the business is looking to possibly become a company in the future then the name may be protected by registration at Companies House. The company can remain dormant until the business decides to start trading as a company.
Partners and sole traders take a profit share of the profits of the business, Directors of a company can take a directors salary which will be taxed under the usual PAYE scheme. Shareholders income is by way of a dividend which is declared by the company. This will have its own tax liabilities and depends on whether the shareholder is basic rate or higher rate tax payer.
Broadly speaking, there is less administrative paperwork for non-incorporated companies whereas companies are governed by the rules laid down by Companies House under the Companies Act 2006.
Continuity of Business
A business will normally end on the death or bankruptcy of the sole trader or both partners, however a Company can survive after the death of its directors or shareholders as shares can easily be transferred from one person to another.
Whether you are a small business owner who has recently started trading or you are an established partnership looking to expand, Bright Solicitors can talk you through all of the points raised in this article to help you decide the best course for your business.