How do I start a business: Phase 1 - The Set Up - Boodle Hatfield

Your lawyers since 1722

12 Nov 2020

How do I start a business: Phase 1 – The Set Up

It is said that there are two barriers to entrepreneurship. The first is that many never actually do it. They discuss an idea, think about it, maybe run some numbers but they ultimately decide it is not for them, or the time is not quite right.

Here at Boodle Hatfield we are lucky to regularly welcome founders who have overcome this first hurdle and we are there to help them overcome the second: pulling it off.

Throughout our near 300 years of experience advising some of the most successful business people in the UK and further afield we have consistently provided practical, considered advice to entrepreneurs seeking to grow, develop and protect their businesses.

This article is designed to be an introduction to some of the key practical matters an entrepreneur needs to deal with when they start a business. This guide deliberately focuses on the nuts and bolts of getting a business off the ground; we find that getting these basics in places frees up a lot of time for dealing with the more exciting aspects of being an entrepreneur.

This article is divided into the following two phases:

• Phase 1 – The Set Up
Phase 2 – Getting Going

Phase 1 – The Set Up

One of the key things you need to consider when you start your business is what legal form it should take. There are lots of ways of structuring a business, but most businesses find one of the following to be the most appropriate.

Sole Trader

The most basic way of operating is as a sole trader. This is the classic ‘one man band’. It means you enter into all the contracts and, often, you do everything associated with your business.

The advantage to this way of operating is it is light-weight and there are little to no reporting obligations (beyond personal tax returns).

The key disadvantage is in relation to liability – you would personally be liable for any losses the business suffers. Looking ahead, raising money and selling the business would more difficult and once you get beyond a certain size counterparties may not view you as so credible.

This route is only likely to be appropriate when the business is starting out or is relatively small.

From a tax perspective, sole traders pay income tax on the profits of the business.

Private Limited Company

Given the disadvantages of being a sole trader many people choose to incorporate a private limited company to run the business from. Under English law a company is its own separate legal personality – in the same way you can enter into contracts with others, a company can do the same. A company must have at least one director and one shareholder. The directors run the company on a day-to-day basis and can make decisions for the company.

Most businesses are private limited companies and compared to other company structures they are relatively easy to operate.

Some regard a disadvantage of companies to be their perceived lack of privacy. In particular all companies have to file accounts annually at Companies House, along with other details (e.g. who the directors of the company are and, at least annually for private companies, who the shareholders are). As well as meaning others have greater transparency into your business, these requirements also increase the administration costs relative to the costs of remaining as a sole trader.

From a tax perspective, private companies pay corporation tax on the profits of the business, with the business owner then paying tax on dividends received from the company.

Limited liability partnerships

The third key entity category to consider are limited liability partnerships (otherwise known as LLPs).

Limited liability partnerships are both run and owned by their members. The distinction between directors and shareholders that you see with limited companies does not apply. Instead the members are largely free to decide how profits of the LLP are shared (rather than this being decided by reference to shareholding). All the members of the LLP have at least some role in the decision making process, but again there is a lot of flexibility as to how this is structured.

A key advantages of LLPs is that they are largely tax transparent, i.e. the LLP itself is not taxed on it profits. Instead the members are taxed directly on the profits.

It is also relatively straightforward to give new members a stake in the business without the tax consequences that would go along with giving a new investor shares in the private limited company.

When LLPs were introduced they were particularly popular with businesses that had traditionally be structured as partnerships (e.g. law and accounting). LLPs combine the flexibility of partnerships, with the limited liability of private limited companies. However they are also often suitable in other contexts, such as property developments and in certain fund structures. They are, in our view, an underrated tool.

To read Phase 2 – Getting Going, please click here.