Five Practical Business Tips Every Startup Should Know

by Startacus Admin

3. Business Structure

Think about the legal format of your business, and get advice on the best one to choose. You might start off as a sole trader, but bear in mind that there are other options.

When most people start a business, they are a sole trader. This means they are the sole owner of the business and, in this type of set-up, there is no legal distinction between the owner and the business. So if the business owes money, and can't pay, the creditors can come after the business owner for repayment and the business owner is liable for these debts, so all his or her assets are at risk. 

Now, you can mitigate this risk by incorporating the business, which basically means setting up a limited company, and running the business through the limited company. That way, if your business doesn't work out and the company can't pay its debts, you only lose the cost of your shares, which could be as little as £1. Obviously you have to have been dealing honestly with your suppliers or the court won't let you get away with it. so, for example if you ran up the debts knowing you would never be able to repay them or if you allowed suppliers to believe they were dealing with you personally, and not with a company, the court will come after you personally. So don't think that having a limited company will give you impunity from everything. Also, anyone lending money or offering credit to a company will often ask for a personal guarantee from the company owner so that they can pursue the owner if the company defaults on the repayment.

There can be tax advantages to running your business through a company, but there is also increased administration and increased costs as the accounting requirements are more onerous. The tax benefits can start to exceed the increased administration costs at profits of around £25k pa so it's something to discuss with your accountant.

There are other reasons for running your business through a company. Some people feel that being a company provides more credibility to potential customers. Or if you have research and development costs a company can claim tax credits which an unincorporated business can't.

If you are going into business with someone else, it is important to agree, in as much detail as possible, and preferably in writing in a partnership agreement, exactly what is expected of each partner; things like their respective responsibilities and profit shares. An agreement can be a very informal thing but the more complete it is and the more detail it contains, the more it will help you settle disputes or even better, avoid them in the first place. You can download simple partnership agreement from the internet, but if there is lot at stake, you should consider having it drawn up by a lawyer.

 When there are two or more people are in business together and  the business is not incorporated, then that business is a partnership, and the partners can decide how to split the profits of the partnership between them. And they can decide that whenever they want. They really should be deciding as early as possible. If their business is incorporated however, profits must be split in the same proportion as the shares. So if two business owners each hold 50% of the shares, then the profits must be split 50:50. They can take different salaries, but once you start taking anything other than very small salaries, you have to pay National Insurance which is obviously more money out of the door and less money for the business owners.


Practical Business Tips Every Start Up Should Know...Continued on Page 3

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Published on: 10th August 2014