One of the preliminary decisions faced when starting your own business is under what guise you should trade. There are various choices of business entity which are available and selecting the right structure is an important consideration.
Two of the more popular trading vehicles in the UK are a sole trader and a private limited company. There are others including two types of partnerships and PLCs which might be appropriate in certain circumstances.
Some factors which may influence the decision of the different business types are as follows:
The Type of Business Activity
Generally, a simple commercial activity may require a straightforward and uncomplicated type of business entity to further the ambitions of the owner.
Typically, small window cleaning businesses which are owned and run by one person may start-up as sole traders.
In situations where there are two or more people involved in the business start-up, they might select a partnership or private limited company. This would enable them to distribute the ownership of the entity according to their wishes.
Ability and Preference on Administrative Tasks
Some kinds of business structure require greater level of administration effort than others. Public limited companies, especially those which are listed on the stock exchange, require more detailed systems for reporting and maintenance than a sole trader might.
The business owners would therefore have to gauge the benefits of the potential enhancement of their standing against the increased administrative costs and other burdens which would be placed up on them when trading as a PLC.
The Importance of Limited Liability
The owner’s views on the importance of limited liability may place a significant part in their decision of how to trade.
Limited liability exists in both private and public companies and in LLPs but is not present in sole trader or traditional partnerships.
A risk assessment of the business and the industry in general might provide sufficient analysis to determine whether such protection would be useful.
Custom within the Industry
Although less significant in today’s world of commerce, certain industries have traditionally been associated with a specific type of business structure.
In addition, larger entities have generally been Limited companies, either private or public, whilst smaller commercial ventures have been known to trade largely as sole traders.
The choice of which format to use to start the business will depend to a large extent, on the personal preferences of the entrepreneurs who will engaged in it.
Whichever kind of entity is chosen, it is they who must be comfortable with the decision that is made.