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What Type of Company to Set-Up

By: Paul Geraghty - Updated: 24 Dec 2010 | comments*Discuss
 
Company Type New Company Start-up Start

People often think there’s a great deal involved in setting up a company. But it’s not necessarily so. Some options are very simple while others are more elaborate.

Types of Company
In Britain, broadly speaking, there are three types of company: the sole trader, the partnership, and the limited company. A partnership and sole trader status are similar – they involved a moulding of your own personal assets with those of the company. This means that, if worst comes to worst, and your company fails, you and your partner (if it is a partnership) are liable for the company’s debts. Your own money or assets can be taken by creditors. This not true of limited companies which is the other major option available to you. Here the company exists as a separate financial entity and there is a legal buffer between it and the company’s owners and officers.

Sole Traders and Partnerships
So now that we know what the options are, let’s look in greater detail at the pros and cons of each. The major benefit of Sole Trader companies or Partnerships is their simplicity. Here you are essentially self-employed. You still have legal and tax obligations, as any citizen does, but they are only marginally more complex than for ordinary employed workers. You should register as self-employed and arrange to pay National Insurance Contributions on a monthly or quarterly basis. You will have to file a Self-Assessment tax return each year and, in the case of partnerships, a separate tax return for the business. Partnerships require a strong bond of trust between the partners. Before beginning a partnership, agreement should be reached on how profits will be divided between the partners, how much capital each will invest in the business, and what happens if one partner wishes to leave the business.

Limited Companies
Limited companies are more complex than the other options. The administrative overhead is far higher but, at the same time, there can be tax advantages which may save you money and there is that helpful barrier between the company’s financial existence and your own. Many accounting firms will be able to create a limited company for you for a few hundred pounds, or offer you one that they have created in advance.

If you decide to do it yourself, you will need to register with Companies House, filling out a standard form and giving details about the company’s name, address and the nature of the business. You will need to designate a company director, which would usually be you (the owner), and a company secretary. These cannot be the same person but you can name a relative or partner to the secretary position. Each year the company secretary must file accounts with Companies House, recording all the income and expenditures of the firm.

While, as mentioned before, the limited company form offers a greater degree of protection of your own financial assets than you have when operating as a Sole Trader or Partnership, the protection is not absolute. If you incur debts without good reason to believe that your company has the ability to repay them, you can be found guilty of fraud and your assets can be seized in settlement of the debt.

Expanding the Business
You may start off on your own but, as things progress, you may find yourself wanting to take on employees to help the business expand. You can do this with any of the company types mentioned above but, if you run a limited company, the red tape is just a bit thicker and the expenses a little more generous. For example, any limited company with 5 or more employees is required to offer a stakeholder pension to its employees if no company pension is provided. You will also need to take care of your employees’ tax and national insurance contributions, and you will need to make further national insurance contributions on behalf of your employees.

Conclusion
Deciding which kind of company you want to create is one of the most important decisions you will make when starting a new career at home. Sole Trader status is the least demanding and a good option for many who are just starting out. Limited companies offer potential savings on tax with a greater burden of red tape overall.

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