Articles | Starting out: should I set up a company?

Rachael Maunder looks at the different business structures available to a new business: sole trader, partnership or company and highlights key factors that might sway your decision

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Rachael Maunder

Rachael Maunder

In most cases when you set up a new business you are not required to use a particular business structure, you can just start as a sole trader with all profits being earned by you as an individual. This is the simplest structure.

If you have a "business partner" you will probably be deemed by law to be in partnership and, if that happens, you will be jointly liable for all the business' debts and obligations, even if they were incurred by your partner without your prior approval. You should therefore make sure that you put in place a formal partnership agreement to regulate how the partnership is run and to minimise the risk of disputes later on.

Another option is to set up a company. There are a lot of factors to consider before doing this such as:

  • the increased burden of having to file information on the public record at Companies House; and
  • the two-tier tax treatment. Profits earned by the company will be subject to corporation tax and then further income tax is payable by the shareholders when those profits are paid out to them.

However, a company has its own legal identity and attracts limited liability. This means that any debts and liabilities belong to the company and the directors and shareholders will generally only incur personal liability if personal guarantees have been given by them. Where you have more than one shareholder we would recommend having a shareholders' agreement, again to regulate how the company is run and to help minimise the risk of disputes later on.

A fourth option is to use a hybrid of a partnership and a company called a limited liability partnership.  This has limited liability but is more tax transparent.

If you would like advice on the best structure for your new business please contact Rachael Maunder.