Legal status- Partnerships and limited liability partnership

Sole Trader

This tends to be the most popular and easiest way for a small business owner to start-up.

Features

• only one person runs and is legally responsible for the business
• no formal registration process except to advise the Inland Revenue and DSS that you are self-employed
• you trade in your own name for example, John Smith or with a trading name such as John Smith trading as My Business
• you are taxed via the Self Assessment scheme. You pay tax twice a year in January and July based on business profits

Advantages

• book keeping is simple. You are only required to maintain a Profit and Loss and Balance Sheet
• quick and simple to get up and running
• you keep all the profit after tax

Disadvantages

• you are personally liable for all the debts incurred
• your personal assets are at risk and can be seized by creditors to settle debts
  
  
  Obviously this wouldn't be relevant to our company as there is four of us

Partnership

This is the next most popular way of running a small business.

Features

• a minimum of 2 partners
• a maximum of 20 partners
• the partnership can operate as �Smith and Jones� or under a trading name such as �Smith and Jones trading as Our Business�. Where trading names are used, partner�s names have to be shown on all correspondence
• no formal registration process but partners have to advise the Inland Revenue and DSS that they are self-employed. It is wise though to have a written partnership agreement which sets out the terms of the partnership, for example, split of profits, leave entitlement, notice period to dissolve, amount of capital put in by each partner. This can avoid painful disputes if things go wrong later on
• the partnership has to keep more detailed financial records which include sales and purchase records, cash book, creditor and debtor details, Profit and Loss and Balance Sheet

Advantages

• relatively quick and easy to start, even if you decide to complete a Partnership Agreement
• if you are organised book-keeping can be simple
• you share responsibility for business debts incurred with the other partners

Disadvantages

• you are personally liable for up to 100% of the partnership debts
• your personal assets are at risk and can be seized by creditors to settle debts
• if your partner(s) cannot met their liability you can be sued for the whole amount the partnership owes even if you only had 50% of the business. For example, just because there are 2 of you your liability is not limited to 50%. If your partner has no assets, creditors can pursue you for 100% of the debt
• being a partner you will have to split the profits in line with the proportion set out in the Partnership Agreement or as verbally agreed

Limited Liability Partnership

A new form of business structure

Features

• introduced in 2001 and designed to operate like a partnership with the benefits of a Limited Company
• set up via registration at Companies House and is seen as a corporate body

Advantages

• individual partner�s liability is limited to a figure agreed by each partner
• personal assets are protected
• taxed the same as a partnership i.e. each partner assessed individually

Disadvantages

• a fair amount of paperwork involved to set up