If you’re starting up a business, one of the first things you need to consider is what type of legal entity is best suited to your situation.
There are many different practicalities to consider in this decision; are you working on your own, in partnership or intending to employ others? For example. Do you intend your business to grow significantly in the near future? Do you have other shareholders to consider?
The legal form you choose needs to reflect your personal situation, the risk you are willing to take and the commercial needs of your business.
Need help deciding? Here are some characteristics of your options:
Becoming a Sole Trader is the most common choice for start-up and small businesses. As a sole-trader you are self-employed and may trade in your own name or may register a business name.
Some characteristics of being a sole trader are:
- Set up can be cheaper, simpler and quicker than a limited company.
- You only need a business licence in order to trade and an optional registration of your trading name with the Jersey Financial Services Commission.
- You can technically run your sole-trader business from a personal bank account.
- Generally speaking, you can produce simple accounts.
- You have the option of forming a limited company at a later date as you scale-up.
- You are personally liable for all your business debts and activity.
- If you sell your business it ceases to exist.
- Your options for raising money are limited.
- You must keep the tax and social security departments updated with your situation.
Are you setting up with another self-employed person? In a partnership you can do this using your own names or a business name whilst sharing the profit.
Some of the characteristics of a partnership are:
- As with sole-traders, it’s simpler and cheaper to setup than a limited company
- You may be able to raise money by introducing new partners
- You could have a ‘sleeping partner’ who contributes capital to have a share in the profits without having an active role within the business
- You only need to produce simple accounts.
- You are both liable for all the partnership business debts
- It is imperative that you have formal agreement of the terms of your relationship, including how a partner can withdraw
- You just need a business licence in order to trade and you can register a trading name with the Jersey Financial Services Commission
- You must keep the tax and social security departments updated with your situation.
Unlike a sole trader or partnership, a limited company is not the same as the individuals who own or manage it – it is it’s own legal identity. Generally speaking, this is harder and more expensive to setup, however it arguably lays a stronger foundation for successful business practice and room to grow.
A limited company has the following characteristics:
- Being a limited company may give your business more credibility.
- It is more costly than forming a sole trader or partnership, you require a dedicated business bank account and will need to submit annual confirmation fees to the Financial Services Department in order to keep your company alive
- Your accounts need to be more detailed – which can be more costly.
- Being a limited company gives extra protection to your personal liability. You are essentially investing in shares of your business and your liability will reflect that. But, if the company trades ‘wrongfully’ or ‘fraudulently’ you may still be personally liable as a director and if you give a personal guarantee (e.g. as security for the company’s overdraft) your personal assets are still on the line.
- It can be easier to raise large sums of money, or to sell part of the business.
- Should you wish to sell the company or pass on shares to someone else, it is easier to do. The company can exist after you leave it.
- There can be tax advantages to keeping money in the business or making a larger pension contribution.
- If you decide to cease trading, it can be difficult and expensive to wind up the company.
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