Starting a business

10 FAQs

1. What are the different legal forms of business?
2. What are the advantages of forming a limited company?
3. Why set up as a partnership?
4. What about limited-liability partnerships?
5. How do I set up in business as a sole trader?
6. How do I start a new company?
7. Do I need a shareholders' agreement?
8. How do we set up a partnership and an agreement?
9. What business name should I choose?
10. What other legal issues do I need to consider?

1.  What are the different legal forms of business?

If you plan to be the solitary owner of the business, you can set up as a sole trader (even if you have employees). If you are going to own the business with another person (or people) you can trade as a limited company, partnership or limited liability partnership (LLP).

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2.  What are the advantages of forming a limited company?

You can involve other people (such as investors, directors or employees) and it offers you the protection of limited liability - which means your risk of loss is normally limited to the money you invest in the business, however, you could be personally liable if you allow the business to trade wrongfully or fraudulently.

Setting up and running a limited company involves more administration and extra costs. One option is to start as a sole trader and then form a company later on as the business develops.

Company profits and income you take are taxed differently from income you'd receive as a self-employed sole trader or as part of a partnership.

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3.  Why set up as a partnership?

In an ordinary partnership, there is no limited liability. Each of the two or more partners is liable for all business debts. Each pays tax and NI on their share of the profits.

Trading as a partnership can be an attractive option, particularly if the business risks are low. But as the business grows it's often a good idea to form a company. The main exception is those businesses where you are required to trade as a partnership. In these cases, it is often better to form an LLP.

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4.  What about limited-liability partnerships, then?

If you're required to trade as a partnership but are concerned about potential liabilities, then it may well be worth setting up an LLP.

Like a limited company, these have to be registered at Companies House, and, in return, you enjoy the protection of limited liability (see 2 ). You're taxed as if you're a partner in an ordinary partnership.

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5.  How do I set up in business as a sole trader?

You have to advise HM Revenue & Customs and you'll need to choose a business name.

If you start a business without forming a company, you'll be seen as trading whether you intended this or not. You're legally required to notify HM Revenue & Customs when you start and may face a fine if you don't. As you have not formed a company, you'll be personally liable for any debts.

If you're in business with someone else and are seen by the law to have formed a partnership, you could be liable for your partner's business debts.

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6.  How do I start a new company?

Ask a company registration agent or your legal advisor. They should provide a basic package - including the company's memorandum and articles - but they're unlikely to include special terms to suit your circumstances.

Choose a company name which is not already being used. You should also provide details of the members (shareholders), directors and company secretary.

Every company must have at least one director and a company secretary (who normally takes responsibility for administering the company). The same person cannot perform both roles. The government is currently reviewing the law in this area. The requirement for a company secretary may be abolished for small firms.

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7.  Do I need a shareholders' agreement?

There is no legal requirement to have a shareholders' agreement, but it's a good idea if you're not the only shareholder. This agreement gives you the chance to agree key issues such as strategy, funding, leaving the company etc. Discuss your requirements with your advisor.

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8.  How do we set up a partnership and make the right agreement?

You're legally required to notify HM Revenue & Customs. Decide whether you'll trade under the names of the partners or use a separate business name. You're not legally required to have a partnership agreement, but failing to draw one up can be a disaster. Setting up an LLP is more complicated. Take advice.

As a minimum, the partnership agreement should include:

• How the business is financed and how much each partner contributes.
• How profits are shared, particularly if shares will be unequal.
• How decisions are made and how disagreements are resolved.
• What happens if a partner wishes to leave.

You should also discuss broader issues, such as what your strategy will be. Agree details such as holiday entitlements, whether you will employ family members and so on.

Failing to prepare a partnership agreement increases the likelihood of disputes and can make it more difficult to resolve them. Also, if you fail to prepare an agreement, then it will be assumed in law that all partners are equal.

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9.  What business name should I choose?

You need a name that will help the business. It should convey the right image, tell potential customers what you offer, stay in people's minds or simply appear early in business directories.

Legally, you must ensure that your name, trading names or registered trade marks are distinct from competing firms. If your name misleads customers into thinking they are dealing with a competing firm, you could be accused of "passing off" and end up in court. Check the index at Companies House, the Trade Marks Registry and the Internet.

Sole traders and partnerships can all trade under their own name or a business name. Companies can choose alternative names for trading. However, if a company does this, it must disclose ownership and the official business address on its stationery, at the premises and if anyone asks.

You cannot use a name that might cause customers or potential customers to confuse you with a rival firm, and neither can you use a misleading or offensive name.

You can see a list of words that have to be justified, and how you justify them at www.companieshouse.gov.uk. Sole traders and ordinary partnerships are prohibited from using the word "Limited" (or Ltd).

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10. What other legal issues do I need to consider?

Various legal issues often arise when you start a business. Common issues include:

• Business licences
• Premises leases
• Health-and-safety assessment
• PAYE
• Employer's liability insurance
• Terms and conditions of trade
• VAT

Talk through your plans with an experienced advisor.

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Disclaimer:

Although we have made every effort to ensure that the information contained in these FAQs is accurate, BHP Information Solutions Ltd. and the named experts disclaim all liability for any errors or omissions.

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