Why the choice of legal status is more than adding Ltd to business name
The old age question for most start-ups and new businesses on which legal structure to choose, is one that must be carefully thought through by every business owner. Although there are general similarities from nation to nation, most economies have their own take on how each works. It is therefore very important to make an informed decision on the right legal structure of the business you want to set up. There are a number of legal structures, all of which differ in several aspects. There are also pros and cons for each status choice. For the full take on this subject please check out chapter 6 of the book “The Business You Can Start”.
Some of the legal structures that are usually adopted include sole trader, partnership, limited liability partnership (LLP), limited liability company (LLC), franchise, and social enterprise. In the US among the common types for consideration to choose from are a C Corporation, S Corporation or LLC status.
However, your choice of legal structure will, among other things, affect other very important aspect of the business, including:
1. Your tax liability and amount of National Insurance or Social security payment you will be liable for. For instance, in the UK, a sole trader’s profits are taxed as income, and also usually pay 2 types of National Insurance:
Class 2 if your profits are £5,965 or more a year,
Class 4 if your profits are £8,060 or more a year
Whereas a Limited Liability company normally have to operate PAYE as part of your payroll. It is the system by which HMRC collect Income Tax and National Insurance from employment. And on your business, The Corporation Tax rate for your company's profits is 20%.
2. The level of risk and control you will have. For instance, an LLC is controlled by the shareholders who appoints the board of directors. Whereas as a sole trader you have absolute control on your business and responsible for any risk you take. In the case of partnerships, each partner share the risks, costs, and responsibilities of being in business.
3. The records and accounts you will need to keep. As a sole trader for example, a basic bookkeeping system can be used to maintain all your records, and only required to prepare a profit and loss account and a balance sheet at the end of the trading year. In partnership each individual partner must make annual self-assessment returns to HM Revenue & Customs. Partnerships have to also keep more detailed financial records such as sales and purchase records, cash books, creditor and debtor details, profit and loss sheets, and balance sheets. An LLC on the other hand, must prepare company’s annual accounts - called ‘statutory accounts’ (balance sheet, profit and loss account, notes about the accounts, a director’s report and an audited accounts depending on the size of your business) from the company’s financial records at the end of the company’s financial year.
4. Your financial liability in the event of insolvency. In the case of partnerships for instance, partners are jointly liable for debts owed, and each partner is also personally liable for the whole of the partnership debts. With LLCs on the other hand, shareholders’ responsibility for the company’s financial liabilities in the event of insolvency are limited to the value of shares that they own but haven’t paid for. Company directors aren’t personally responsible for debts the business can’t pay if it goes wrong, as long as they haven’t broken the law. However, as a sole trader your home or personal assets could be used or sold in paying the debts incurred by your business.
5. The transferability of the business. It is very easy to transfer your interest to another person either by selling or by inheritance as a sole trader, for instance. It is also much easier to transfer ownership of a Limited Liability Company, usually by means of transferring ownership of shares held.
6. The way management decisions are made in respect of the business. A director or board of directors makes the management decisions in a Limited Liability Company. A sole trader on the other hand makes all the decisions in managing the business without the need to consult anyone for their approval. In a partnership, partners usually have to consult with one another before a final decision is made.
7. The ways you can raise money for the business. Partners usually contribute to raise the capital either in cash, own assets or take loans. Sole traders can raise capital from their own assets, friends, bank loans, etc. Public limited companies can raise money by selling shares on the stock market, but private limited companies cannot. LLCs are therefore usually financed by shareholders’ contributions, loans, and retained profits.
The above are some of the essential considerations you need to factor in, when deciding of the right legal structure to adopt for your business.
It is also equally important to weigh the advantages and disadvantages of each option as you decide on the best option. From the above it is also very clear the impact of the legal status of a business has far more reaching consequences than just adopting or using an Ltd. at the end of your business name or not. For more detailed analysis and the advantages and disadvantages of the various legal status options, please check out the chapter 6 of the book “The Business You Can Start”.
Victor Kwegyir is a business coach, consultant, author and speaker with over 18 years experience in business.
Victor offers professional business advice to help start-ups & existing businesses to start and/or grow successful businesses.
He is also the author of three successful five (5) ***** star review rated books, including his latest -“Pitch Your Business Like a Pro”, “The Business You Can Start” and the co-authored book above, “You’ve Been Fired! Now What?” Available on Amazon, BarnesandNobles.com and bookstores worldwide on order. You can order the eBook versions on any Ebook platform, including, Smashwords, iBookstore, iTunes, Kindle, Nooks, Sony Reader, Kobo, and Diesel.
Some of the legal structures that are usually adopted include sole trader, partnership, limited liability partnership (LLP), limited liability company (LLC), franchise, and social enterprise. In the US among the common types for consideration to choose from are a C Corporation, S Corporation or LLC status.
However, your choice of legal structure will, among other things, affect other very important aspect of the business, including:
1. Your tax liability and amount of National Insurance or Social security payment you will be liable for. For instance, in the UK, a sole trader’s profits are taxed as income, and also usually pay 2 types of National Insurance:
Class 2 if your profits are £5,965 or more a year,
Class 4 if your profits are £8,060 or more a year
Whereas a Limited Liability company normally have to operate PAYE as part of your payroll. It is the system by which HMRC collect Income Tax and National Insurance from employment. And on your business, The Corporation Tax rate for your company's profits is 20%.
2. The level of risk and control you will have. For instance, an LLC is controlled by the shareholders who appoints the board of directors. Whereas as a sole trader you have absolute control on your business and responsible for any risk you take. In the case of partnerships, each partner share the risks, costs, and responsibilities of being in business.
3. The records and accounts you will need to keep. As a sole trader for example, a basic bookkeeping system can be used to maintain all your records, and only required to prepare a profit and loss account and a balance sheet at the end of the trading year. In partnership each individual partner must make annual self-assessment returns to HM Revenue & Customs. Partnerships have to also keep more detailed financial records such as sales and purchase records, cash books, creditor and debtor details, profit and loss sheets, and balance sheets. An LLC on the other hand, must prepare company’s annual accounts - called ‘statutory accounts’ (balance sheet, profit and loss account, notes about the accounts, a director’s report and an audited accounts depending on the size of your business) from the company’s financial records at the end of the company’s financial year.
4. Your financial liability in the event of insolvency. In the case of partnerships for instance, partners are jointly liable for debts owed, and each partner is also personally liable for the whole of the partnership debts. With LLCs on the other hand, shareholders’ responsibility for the company’s financial liabilities in the event of insolvency are limited to the value of shares that they own but haven’t paid for. Company directors aren’t personally responsible for debts the business can’t pay if it goes wrong, as long as they haven’t broken the law. However, as a sole trader your home or personal assets could be used or sold in paying the debts incurred by your business.
5. The transferability of the business. It is very easy to transfer your interest to another person either by selling or by inheritance as a sole trader, for instance. It is also much easier to transfer ownership of a Limited Liability Company, usually by means of transferring ownership of shares held.
6. The way management decisions are made in respect of the business. A director or board of directors makes the management decisions in a Limited Liability Company. A sole trader on the other hand makes all the decisions in managing the business without the need to consult anyone for their approval. In a partnership, partners usually have to consult with one another before a final decision is made.
7. The ways you can raise money for the business. Partners usually contribute to raise the capital either in cash, own assets or take loans. Sole traders can raise capital from their own assets, friends, bank loans, etc. Public limited companies can raise money by selling shares on the stock market, but private limited companies cannot. LLCs are therefore usually financed by shareholders’ contributions, loans, and retained profits.
The above are some of the essential considerations you need to factor in, when deciding of the right legal structure to adopt for your business.
It is also equally important to weigh the advantages and disadvantages of each option as you decide on the best option. From the above it is also very clear the impact of the legal status of a business has far more reaching consequences than just adopting or using an Ltd. at the end of your business name or not. For more detailed analysis and the advantages and disadvantages of the various legal status options, please check out the chapter 6 of the book “The Business You Can Start”.
Victor Kwegyir is a business coach, consultant, author and speaker with over 18 years experience in business.
Victor offers professional business advice to help start-ups & existing businesses to start and/or grow successful businesses.
He is also the author of three successful five (5) ***** star review rated books, including his latest -“Pitch Your Business Like a Pro”, “The Business You Can Start” and the co-authored book above, “You’ve Been Fired! Now What?” Available on Amazon, BarnesandNobles.com and bookstores worldwide on order. You can order the eBook versions on any Ebook platform, including, Smashwords, iBookstore, iTunes, Kindle, Nooks, Sony Reader, Kobo, and Diesel.
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