Is Company Formation Right For You?

By Author: Alex Richards
Total Articles: 65
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One of the first things you will need to consider for your business start-up is the selection of your businesses' legal structure and deciding whether forming a limited company is right for you. This is often the structure that is most suitable for your business and is a big step for anyone looking to start a new business. There is a wide selection of business structures that you will want to consider before embarking on your business adventure, such as:

Sole Trader
Partnership
Limited Liability Partnership
Private Limited Company
Public Limited Company
Unlimited Company
Company Limited by Guarantee
Community Interest Companies

Each of these formations have different considerations with regard to tax, risk management and regulatory issues, but the most common forming a private limited company or setting up a business as a sole trader tend to be most common.

Firstly, we will look at the positives and negatives of becoming a Sole Trader. A sole trader is a business entity owned and run by one person, where there is no legal distinction between the owner and ...
... the business. Generally this means that the owner will reap all the benefits, as well as the biggest risks. This could even mean the loss of their personal belongings if the business fails.

The pro of becoming a Sole Trader is that the accountancy and administration work is fairly simple; you'll find you are only required to annually submit an individual self assessment tax return. Preparing Business accounts is not as complex as for a Limited Company, which can result in reduced administration costs. There are also no requirements to make business information and accounts public, and the business can be run whichever way the owner deems necessary.

Disadvantages include unlimited Liability, which essentially means there is no separate legal identity between the business and the owner, and therefore their personal possessions are at risk. The tax burden is generally high compared to that of a Limited Company, and the credit rating of the owner can affect the business' credit rating. It can also be more testing when trying to raise funds for the business and there could be a negative perception of the company as an unincorporated business. Finally, it can be harder to sell a business as a sole trader in comparison to running a limited company.

If becoming a Sole Trader is not the correct path for you, then you may wish to consider becoming a Limited Company. A Limited Company is a corporate structure owned by its shareholders and has a separate legal entity from its owners, which generally means that an individual's personal assets are safe.

Positives of becoming a LTD company are that they offer limited liability to shareholders, and therefore the shareholder has no personal liability beyond their investment in shares. It is also often much easier to raise funds through the sale of shares, and the corporate image of the company is often improved, which helps make the company look a far more attractive proposition to potential clients. It is also far easier to sell a LTD Company than a Sole Trade Business.

The negatives are that there is less privacy, due to the fact that that certain business information is available for the public to review (such as your competitors). Professional accountancy services are normally required to assist with the preparation and filing of accounts and tax returns. Administrative expenses will be higher than a Sole Trader to ensure compliance with formalities of company law, such as preparation of board minutes and shareholder resolutions.

So there are the facts, now it's up to you to decide whether you would benefit most as a Sole Trader or Limited Company.