The legal status of your business is usually a headache-inducing topic. Here’s a quick guide on how to categorise your business.
What is a Trading Vehicle?
‘Trading Vehicle’ is the unnecessarily complicated and ambiguous term used to describe the legal status of your business. It’s very important because the trading vehicle you select, will ultimately impact on a range of issues concerning the day-to-day running of your business, the legislation that affects it as well as the level of taxes and charges you will pay.
There are 3 main options open to you when selecting the legal status of your business:
Sole Trader
This is a really popular choice for freelancers, people running small businesses or startups which they eventually hope to grow into a much larger enterprise.
People tend to assume that ‘Sole Trader’ means you’re working on your own, but what it really means is that you are running your own company (which you own) as an individual, rather than as an organisation.
The main benefits of this vehicle are, that you personally get to keep all the profits of your businesses after taxes have been paid and that you retain the maximum level of control of your enterprise.
The most significant limitation of being a sole trader is the level of personal liability which it can place on you, including responsibility for the businesses legal matters and any financial losses which are incurred.
Ordinary Business Partnership
This structure is similar to ‘sole trader’ but instead of being the only owner of the business, you have a partner (or sometimes more than one) with whom you share equally the liabilities and benefits of the business. This is a structure which is becoming more and more common nowadays, as business / startup collaborations gain popularity as a way of creating and growing a business.
The benefits and limitations are much the same as those which are associated with being a sole trader, but in this case at least, the liabilities which you are personally exposed to are half (or less) than what they would otherwise be.
Limited Company
As you business grows, it may become necessary for you to minimise your personal liabilities by creating a limited company with which to manage it.
A limited company is an organisation established by you, to which you give operational, legal and financial control of your business. It is entirely separate from you and has ultimate responsibility for everything that it does.
As someone who owns a portion of, or all the shares in the company, you are known as a member. The people who actually run the business are now called directors and are usually also members.
In a limited company you are not financially responsible for its financial losses. Tax is paid on any profit and the remainder can be left in the possession of the business or paid out to shareholders in the form of dividends.
Hopefully this whole issue is a little clearer now. For more information on any issue regarding the legal structure of your business, then your first port of call should be the HMRC website where there is also a step by step guide to changing from one legal structure to another.
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