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Books on Incorporating

What Type Of Company Should I Set Up?



When setting up your company you need to decide at an early stage how you intend to structure it. What type of company legally beneficial - a Limited Company, a Partnership, Limited Liability Partnership or Sole Trader?

This decision can have both legal and practical implications, so it's an important decision to make. It's advisable to seek individual advice before you commit yourself to any of the four basic options:

Limited Company

A limited company is where shareholders (members or owners) have limited liability to the company's debts. Their liability is restricted to the value of the shares that they own or the guarantees that they signed up to. This could be as little as 1.

A limited company is a separate legal entity. It can sue and be sued and will continue to exist even if the members or owners die or resign. It can only be folded if it is wound up or struck off the register by Companies House.

In return for these benefits, limited companies are governed tighter rules and regulations than partnerships or sole traders. Among other things they are obliged to:

* File annual accounts and returns at Companies House, facing penalties if they are late.
* Appoint at least one company director and a company secretary - and face criminal prosecution if they fail to.
* They have to use the word limited in their company name
* Notify any changes to members, officers or registered office address.


A partnership is a business arrangement where 2 or more people (usually up to a maximum of 20) are in business together to make a profit. A partnership agreement has no limited liability of debts as partners share the business costs, profits and debts

Limited Liability Partnership (LLP)

The Limited Liability Partnership (LLP) came into operation on 6 April 2001. It is a new legal business structure that aims to combine the flexibility of a partnership arrangement with the benefits of limited liability. The main differences between a limited company and an LLP are that that the latter is taxed as a partnership rather as a corporation and that it has more organisational freedom. An LLP's duties in return for the limited liability status are similar to those applying to limited companies.

Sole Trader

A sole trader is someone who is in business on his or her own account. They are self employed and personally liable for any debts the business incurs.

It is imperative that you work out which of these four options is right for you as it has wide-ranging implications. Often the decision will be forced on you by the rules of the business you work in or your personal circumstances. For example a solicitor or accountant planning to set up his or her own law or accountancy firm is in effect forced to be either a sole trader or in a partnership. This is because the law currently does not allow solicitors or accountants to limit their liability and therefore, will not allow them to form limited companies.

You may like the independence that a sole trader has to offer or you may wish to limit the risk you are taking by opting for a Limited Company or LLP. Either way, you need to consider the decision carefully and should seek specialist advice from your solicitor or accountant.


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