In this series of articles we walk you through the steps needed to prepare for the journey to grow your start-up business and find investment.
When setting up a business in the UK there are various trading vehicles or business structures to choose from. Making the right choice from the start or early in the life of your business can help prevent legal and admin headaches further down the line. In this brief insight we outline the pros and cons of some of the key structures.
The simplest business structure with no distinction between the owner and the business. It can simply be "Joe Bloggs trading as XYZ". The owner makes all decisions and owns all business assets personally.
Pros: Easy to set up. Low admin costs. Owner solely benefits from the business' success.
Cons: Lack of legal formality. Owner is personally liable for all business debts and obligations. Can be harder to achieve investment or funding.
A relationship between persons who, together, carry on a business with a view to profit. No legal personality is created separate from the partners, so each of the partners is liable for the acts of the partnership as a whole. Partners own and manage the business. A partner can be a company, not just an individual.
Pros: Minimal legal formalities to form, although wise to put a partnership agreement in place. No ongoing filing requirements with Companies House.
Cons: Partnership cannot own assets in its own name or grant security over them. Partners have unlimited liability for all debts and obligations. Partners can be sued for the wrongful acts or omissions of their fellow partners.
Like an English and NI General Partnership, a Scottish GP is a relationship between two or more persons who, together, carry on a business with a view to profit.
However, in contrast, a Scottish GP has separate legal personality from its partners. This means it can own assets, enter into contracts, sue and be sued, and become a partner in another partnership.
Pros: Separate legal personality from its partners. Tax transparent (meaning that members are taxed directly on their share of income and gains and no tax is paid at the partnership level).
Cons: Every partner has unlimited liability to creditors for all the partnership debts.
Like a general partnership but with two classes of partner – General Partners (responsible for managing the business, with unlimited liability for the debts and obligations of the partnership) and Limited Partners (with limited liability up to their capital contribution provided they do not participate in management).
Pros: Separation between management and ownership through class of partners. Some partners can have liability limited to their capital contribution. Generally no ongoing administration or filing requirements. Tax transparent (meaning that it is not taxed as a distinct entity, instead you look through the LP and the partners are taxed directly on the profits arising from the LP's activities).
Cons: No separate legal personality so cannot own assets or grant security over them. Must have at least one limited partner who does not take an active role in the partnership's operation. Required to register with Companies House.
Like an English and NI Limited Partnership, a Scottish LP (SLP) has two classes of partner.
However, in contrast, SLPs do have separate legal personality, meaning that they can own assets, enter into contracts, sue and be sued, own property, borrow money and grant certain types of security rather than through the agency of their general partner(s). As such an SLP may be a member of another partnership.
Pros: In addition to those listed for an English and NI LP, the main advantage of an SLP is its separate legal personality.
Cons: Must be registered with Companies House (in Scotland). Subject to a modified PSC regime (meaning every SLP must now investigate whether it has any persons with significant control or relevant legal entities).
An LLP is a separate legal entity which is owned and run by its members. It combines some aspects of partnerships with some aspects of companies. Like a company, its members' liability is generally limited to their individual capital contributions. Every member has a right to participate in the management of the LLP.
Pros: Separate legal personality from its owners. Liabilities and debts are the responsibility of the LLP not its members. Members' financial exposure is limited to their capital contribution. No capital maintenance requirements. Capable of raising finance through a "floating charge". Tax transparent.
Cons: Specified procedure for incorporating and registering at Companies House. Ongoing filing and disclosure obligations, although these are not as great as those for companies.
A company exists in its own right, as an entirely separate entity from the people who manage or own it. It can enter into contracts itself and holds its own assets. Owners are known as shareholders and can share in the company's profits. They have control over certain key matters but day-to-day management of the company falls to directors (who are often also, but do not have to be, shareholders).
Most commonly these are "companies limited by shares", often referred to as limited companies, which must be registered with Companies House.
Pros: Limited liability for shareholders once they have contributed the value of their shares. Directors are not personally liable for the company's debts (save in very specific circumstances). More flexibility in raising finance, for example through issuing shares or granting "floating charges".
Cons: Increased administrative burden and costs with formation and ongoing filing requirements with Companies House. As filings are publicly availably it can make some financial information open to competitors. Strict controls over returns of value to shareholders. Taxable as an independent entity, with profits then potentially being passed on to shareholders as dividends or to director shareholders as salary (both options being subject to further taxation). However, the applicable tax rates may "balance out" such that are outweighed by the benefit of limited liability.
A company whose shares can be purchased by the public provided it has allotted share capital with a nominal value of at least £50,000 (or a prescribed Euro equivalent). Can be listed on a stock exchange but this is not a requirement.
With all of the above, tax treatment is going to be a key consideration and specialist guidance and advice should be sought. There are many different and complicated rules which means it is not practical to give a full survey of tax implications here. The way in which you wish to run your business and the assets involved will influence your approach and the extent to which efficient tax planning can be put in place.
It is important to choose a business vehicle which works for your venture before contemplating opportunities for investment. In our next insight, we will talk through what all start-ups need to consider when preparing for investment.
If you would like to chat through any of the above, please do get in touch with anyone in our Corporate team who will be happy to help.
Contributor: Robyn-Dee Herdman
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at September 2019. Specific advice should be sought for specific cases. For more information see our terms and conditions.
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