Business Structure First Steps

Should I Form a Limited Company?

limited company
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Is forming a limited company the right route for your small business? When you first start up, you will face an important decision on your operating model. Do you choose to operate as a sole trader or partnership, or as some form of limited company? The right decision for you will depend on many factors, including your own circumstances and your business plan.

Why a Limited Company?

As a sole trader or a partnership, you will have responsibility for all or part of the company’s potential debts. This may seem a reasonable risk, depending on the potential turnover of the business. However, you can get more financial protection by becoming limited.

Being a limited company effectively separates your own personal finances from those of the business. The legal identity of the company is also separate from the identity of the owner. Two forms of limited company exist – a limited liability company, and a limited liability partnership or LLP.

Limited Liability Partnership

The LLP type of limited company may in many cases be suited to small businesses. It is a simple way to start a small business with a group of friends or colleagues. The LLP offers financial protection, without all the attendant complications of a limited company. It is an ideal choice when a regular turnover of members is likely in your business. Enterprises such as law firms or professional services companies may find an LLP useful.

Financial Protection

An LLP is just as flexible as an ordinary partnership as far as tax and regulations are concerned. The main advantage is the limit of financial liability per partner. A partner is only liable to the amount of capital they have contributed to the LLP. The limit on liability also means that a partner’s personal assets cannot be taken to pay off creditors. This is unlike a sole trader or a normal partnership, where it is possible to lose your money and home.

Fees and Legal Help

If you set up an LLP, you will need to register with Companies House before commencing trading. There is a moderate fee to pay for registration, and it may be advisable to involve legal professionals. This makes a limited liability partnership a little costlier than a normal partnership. If you want to protect your assets, it is a price well worth paying.

Further Advice

If you would like to find out more information about which type of business structure might suit your ideas then an ideal place to start is the GOV.UK website company structure page.

Another useful link is this one to Companies House, which gives access to advice and all the forms you will need to register your limited partnership.

For more information on this subject email us at editor@startuphelp.org.uk or complete the form below, and we’ll do our best to guide you to the right decisions.

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