This is when one person starts up a business with no legal formalities. They begin trading as sole traders and are self-employed. They are taking on all the financial risks of the business. This means that all their personal assets are at risk if the business fails. However by being a sole trader you have almost complete control over how your business is run and how it operates. The only legal requirement is that you keep records for HM Revenue & Customs; other than that, administrative costs are minimal. Sole traders are rather efficient from a Tax and National Insurance point of view.
This is when two or more people run a business together with a view of making a profit. Although it is not legally necessary, a partnership agreement is essential and will outline how the business is to operate and how profits and losses are shared. It is important to know that even if you own a very small proportion of the partnership, you may be personally liable for 100% of the liabilities.
Although a partnership can be risky, it is easy to set up and has very few legal requirements. You are required only to keep records for HM Revenue & Customs purposes and each partner is taxed individually, however there is the risk that the partners’ personal assets are at risk if the business fails. The other risk with partnerships is that a large amount of partners have arguments and fall out with each other which can lead to the end of the partnership and often leads to litigation.
This is very similar to a partnership situation however the concept of limited liability is extremely important. This means that the liability of the partners will be limited; it will protect the partners’ personal assets so that they cannot be at risk if the business fails. An LLP has the tax advantages of a sole trader or partnership however they must provide financial information equivalent to that of companies including the filing of annual accounts with Companies House along with partners’ names and addresses and registered office.
Forming a limited liability company is the most common form of legal vehicle used by most businesses and charities. A limited liability company is an entirely separate legal entity. The company is owned by shareholders and is run by directors who are appointed by the shareholders. The shareholders have limited liability in relation to the failure of the business and debts owed. Their liability is limited to the amount they paid or owe for their shares in the company or limited by guarantee. Although this is an advantageous point, limited liability companies have very stringent legal requirements and must report and file information with Companies House. Another significant advantage of all limited liability vehicles is that unlike a sole trader or an ordinary partnership they have continuity, on change of ownership.
A Plc, is a company which can offer its shares to the general public, thus attracting large investment. It has the same limited liability comfort as a private company and in time can be floated on the stock exchange. A Plc. can also be run as a private company but is often avoided as the financial information required to be filed at Companies House is much wider than that of a private limited liability company.