Forming a Business

1. Choosing the Legal Form

The legal form you choose for your business will depend on your commercial needs, the financial risk you are willing to take, and your tax position.

1.1 Setting up a limited company offers flexibility if you plan to grow the business. (See 2).

• A limited company is a separate legal entity, distinct from its shareholders, directors and employees. The business can continue despite the resignation, bankruptcy or death of directors or shareholders. The company can only cease as a separate entity through striking off or winding up.
• It is relatively easy to involve outside investors by selling them shares. It is always worth being careful about who you allow to become shareholders as they share in the ownership and possible the decisions making of the company.
• The risk of loss is normally limited to your investment, primarily in share capital. If you stand as personal guarantor for any of the company's debts, the risk of loss is potentially greater. There may be a risk if you do not comply with legal statutory requirements.
• Limited companies are often perceived as having a better reputation than sole traders.

1.2 You may choose to operate as a sole trader if you are the owner-manager of a small business. Setting up is easy. (See 4).

• You are self-employed. You personally own the assets of the business and are personally responsible for any profits or losses of the business.

1.3 You can form a partnership if two or more of you work as partners, sharing the profits or losses. (See 4).

• You and your partners personally own the assets of the business. Any losses would normally be shared between you. But if others cannot pay their share, you are liable for their share, as well as your own.
• Alternatively, you can set up a limited liability partnership (LLP), in which individual members have protection from the partnership's debts, but they have to make more information available.