Like many accountants, at AIT we are regularly asked – what is the best way to set up a new business – partnership or a limited company?
It is one of the first questions when a new venture decide what is the best way to trade and the answer will depend on many factors.
If you’re on your own, then becoming a sole trader may well be the best option. However, if you want to work with and perhaps employ people, you can trade as a partnership or a limited company.
The partnership is a very different proposition from a limited company in terms of accounts and liability.
However, there are advantages and disadvantages to both, so you need to do your homework.
In essence a partnership is similar to a sole trader business but must involve two or more people to own the business.
- Tax efficiency. In a partnership you take earnings as opposed to paying yourself a salary through PAYE. Also you don’t need to make National Insurance contributions.
- There’s less bureaucracy in that there is no need to register at Companies House or file annual returns. However, it is usually recommended that a partnership agreement is made, which details the business structure and each partner’s responsibilities.
The disadvantages are:-
- Joint and several liability, which can be a big issue as few think at the beginning about what if the business fails. Each partner is liable for the entire debt of the business.
- No matter each partner’s financial status if one cannot afford to pay any debt back and goes bankrupt the full debt will be left to the remaining partner.
- If a partner leaves the business they may still be liable if the business becomes insolvent at a later date. Some partners who leave choose to continue investing. However, they could be brought back into legal dispute and liability clauses if the business becomes insolvent.
- The shared responsibility can be messy and lead to rows.
What exactly is a Limited Liability partnership (LLP)?
Simply, it is a structure that gives partners limited liability and is similar to a limited company, whilst keeping the tradition of a partnership. It gives the partners the benefits of a partnership, but allows wriggle room if things go wrong.
The key features of a limited company:-
It’s owned by the shareholders and all the profits belong to the company, meaning company debt remains separate from individuals.
- If the company goes into decline the personal assets of the directors and shareholders will not be affected. However, if there’s been fraudulent trading the directors will be personally liable.
- Work and home life can be separated financially because a limited company means there will be clear legal boundaries between the two.
- There’s more paperwork, such as registering at Companies House and filing annual returns. This also means higher accountancy fees.
- All companies must pay corporation tax.
- There will be more director duties and legal responsibilities to learn.
- Sometimes creditors may worry that dealing with a limited company they will have less protection against debts.
So, in summary it is not straightforward. If the business is a great success a partnership can be beneficial. However, if the business were to fail, would you pay off the entire debt and put your own personal finances at stake?
We at AIT say that whatever kind of business you want to set up or how many people you want to involve you must weigh it all up.
You need professional advice from an accountant who can give you advice based on your personal circumstances.
Take your time and research. Talk it over and don’t act in haste.
If you wish to discuss this with us at AIT just give us a call.