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What legal considerations do I need to think about when setting up a business? (Part 1)

If you are considering setting up a business there are numerous decisions that you will have to make, including whether you will operate as a sole trader, in partnership with someone else or through a company.  With the last two options, you will also need to think about the structure of your business.

To make an informed decision about the type of business vehicle that would work best for you, you need to be aware of the legal responsibilities and obligations that each will impose on you.

In the first of two articles on this subject, JPP Law explain what you need to think about if considering setting up as a sole trader or in partnership.

Sole trader

The easiest and quickest way to get started is to work as a sole trader.  With this option, you will be able to start operating with little formality and with the freedom to make all decisions yourself.   Any profits you make will be treated as personal income, so at the end of each tax year you will simply need to complete a self-assessment form as a self-employed person.

The drawback to being a sole trader is that you assume personal liability for all business debts, so you expose yourself to significant personal risk.  Depending on the size of your debts and your ability to pay them, you could face the prospect of having a county court judgment made against you and the possible loss of your home or bankruptcy if you cannot pay what you are ordered to.

Partnerships

If you choose to trade with one or more people as a partnership, you will need to formalise your arrangements and will almost certainly want to make most decisions (especially significant ones) jointly.  All partners within the business will share liability for the business debts, although someone you owe money to could choose to go after one of you for everything rather than trying to pursue you all.  This is because liabilities in a partnership are joint and several.

As well as each partner submitting their own self-assessment return for tax purposes, you will also need to submit a joint partnership tax return to HMRC.

If you are thinking about creating a partnership, it is vital that you take legal advice and ensure you have a well-drafted partnership agreement to cover the arrangement.

Limited liability partnership

A limited liability partnership offers the structure and flexibility of a partnership, but with more protection against potential liability.  With this option, you will still need an agreement to govern your relationship with the other partners, and you will also need to submit business as well as personal accounts to HMRC.  However, your personal liability for business debts will usually be limited to the total sum that you invested initially.

Other considerations

There are other factors that may influence your decision, such as the need for more finance to get the business off the ground than you can afford, or a desire to offer a broader range of services than you are personally qualified to undertake and where there is not enough money available to employ someone.  A solicitor can help you determine what your requirements are and how they can be met, and then advise you on which option they think would be right for you.

Read part two now. 

JPP is a passionate supporter of start up businesses and can offer advice and guidance on business structure, funding, legal documents, including shareholders agreements, and intellectual property rights often at a packaged fixed price.

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