Home Budget 2007 Company Profile Services Accountancy Zone Business Zone Tax Zone IR35 Update News Articles Feedback Search Legal Notice How To Find Us Selecting the right structure Deciding what type of business is something that many people overlook. You should give some thought as to what you want to achieve and which structure will be best suited to your goals. There are also a number of legislative differences between the different types and a wide range of tax implications. It's always best to contact us if you are unsure. Sole Proprietorships Being a sole trader does not mean you have to work alone, but that you are totally and solely responsible for the business. You take all the profits, but you are also personally liable for all the debts incurred. Should you not have the money in the business to pay your business debts, your personal possessions, including your home, could be taken in settlement. Many small businesses start as sole traders and are later turned into limited companies. Sole traders may trade under their own name or else under another name or title. However if the name that you have chosen to trade under is not your own surname(s), you must indicate the name(s) of the owner(s) on all stationary. Partnerships A business partnership is an association of two or more people (up to a normal maximum of 20) trading together as one firm and sharing the profits. The partners are normally jointly and severally liable for the whole of the firm's debts, to the full extent of their personal means, just as though they were sole traders. This means that if one partner should abscond, the others have to pay all the outstanding debts, including what would have been the absconder's share. An exception to the normal joint and several rule for debts applies to tax (but not VAT). The partnership as a whole gets a tax return, but the partners must each enter their own share of pre-tax profit on their own tax return, and are then responsible for paying the tax in the same way as if they were sole traders. It is important, in a partnership, to have a simple agreement setting out each partner's share of the profits and how each partner's share is to be valued if he or she wants to withdraw from the partnership, or a new partner comes in. The agreement should state for how long the partnership is to run or under what conditions it can be terminated. Contact us for guidance on the wording of such an agreement. It will also state: How much can each partner draw on account of his/her share of the profit; What voting rights the partners have; Who signs the cheques; What the arrangements for holidays are and what happens in the case of long illness; and What happens if an ex-partner wants to start trading in competition. Limited Companies A limited company is a legal entity, just as though it were a person, and must be conducted according to the rules laid down by company law. They include: the maintenance of accounts; an annual audit; and disclosure of the company's activities to the general public. However, some of the requirements are relaxed for smaller companies. In particular, there is no requirement for an annual audit if your annual turnover is £350,000 or less. The advantage of limited companies over other forms is that the shareholders (the owners of the company) are liable for its debts only to the extent of the face value of their shares. However, a director's liability can be extended by personal guarantees that he or she may have given to a bank or other financial institution as security for a business loan. Also, directors are made personally liable and subject to criminal prosecution if they continue trading or take credit knowing that the company is insolvent. Limited companies may be public or private. The vast majority of companies are private do not offer shares to the public. A major review of company law is currently under way, although any proposals arising from it are unlikely to take effect until 2002 at the earliest. Franchises Franchising involves a company selling its experience and established reputation to individuals, the franchisees. The purchase of a franchise is the purchase of the right to use a particular method to run a particular kind of business. The entry price can be considerable and it is for you to assess whether the potential rewards are worth it. Becoming a franchisee usually means that you will own the business assets (premises, equipment and so on) but you will certainly not own the business method. You are at liberty to decide the most appropriate method of trading, whether as a sole trader, in partnership or through a limited company. A large range of franchises can be purchased. These vary from food outlets to service industries. In acquiring a franchise, you are able to run your own business and still be part of a large network. However, your business operation, and your trading accounts in particular, will be subject to scrutiny by the franchiser. You will be buying a right to trade for a limited period only, typically five years. This may be coupled with the right to renew the franchise at the end of that period. The cost to you will be the payment of a capital sum on entering into the agreement, and probably also further sums (service fees) while the agreement lasts. The latter may be related to sales or turnover, or both. The clearing banks have specialised departments that deal with, and advise on, franchises. Understandably they take the view that the purchase of a suitable franchise helps to minimise the risks of starting up a business. You will, of course, need to make your own capital contribution to the initial costs; a bank will generally expect this to be at least 30% of the total. Subject to this point, the raising of capital will be likely to be more straightforward than in starting a business from scratch. It is best to deal with a franchiser who is a member of the British Franchise Association, which has published a guide. Acquisitions The purchase of an existing business is usually undertaken by people who are already in business and wish to expand their operations or change business venues. But it can also apply to someone starting in business to acquire an established business enterprise. The main problem is often coming up with the asking price. Seek advice before embarking on this course of action. Management Buy-Outs (MBOs) A lot of publicity has been given in recent years to employees buying the business in which they work. This is, in fact, an opportunity which arises only rarely. The owner's motives for selling the business (and, of course, the accounts of the business) should be scrutinised very carefully. If you are planning to buy a business which has failed, then unless you know exactly why the original company went out of business, and have definite proposals for putting things right, you will not find it easy to raise the necessary finance. If you have been made redundant by the winding up of a company or know of a company that has been wound up, consider whether there is any part of the operation or assets (some of the workshop plant, for instance) that you could buy and use in starting a project of your own. There is little to stop employees who leave an existing company from setting up in competition. Even if there is a clause in their contract of employment restricting their future business ventures, the courts will not uphold a contract that is a restraint of trade and denies anyone the right to earn a living. However, the ex-employer may stop former employees from making use of his or her trade secrets or confidential information by taking out an injunction. Tax Considerations Many factors should be considered when deciding whether to conduct a business through a company or not. These include commercial factors and company law issues, as well as taxation. Some of the main tax factors are listed below. An individual or partnership is liable to income tax at up to 40%. The income of an individual or partnership is also liable to Class 2 and Class 4 National Insurance contributions. Rates of corporation tax are lower. The small companies rate is now 20% and the full rate of corporation tax is 30%. On the other hand, additional tax and possibly National Insurance liabilities may arise when profits are extracted from the company. [ Business Zone Home · Previous - Business Plans - Financial Matters · Next - Setting Up Your Business ]