In my previous piece, Jo set up an online personal fitness hub called Fitness Match and was thinking about what form her business should take.
She’ll be exceptionally busy while she’s setting up, so will want to keep admin to a minimum. She’ll also want to be confident that she’s not exposing herself to too many risks. If she operates the business as a sole trader, she’ll be liable for any of the liabilities of Fitness Match. This means that, if it all goes wrong, creditors could come after her personal finances, including her home, in order to satisfy any unpaid debts. For this reason, many small businesses operate as limited companies.
So, is it a good idea?
Going limited: the pros…
A limited company would be a separate legal entity to Jo who would be a shareholder. This means she would have no personal liability beyond the amount she had paid for the shares, which could be a low nominal value.
A company structure also provides an opportunity to raise money by issuing shares, is often easier to sell than a sole trader business and looks better to both customers and creditors because it is established and regulated.
There are also tax benefits. For example, Jo could receive part of her salary by way of a dividend which would be subject to a lower rate of tax. Then, if the business expands and Jo wants to employ staff, she could offer them shares through tax-efficient incentive schemes.
Equally, once she starts selling sports kit and developing her own fitness inventions, she may need investment from third parties. A company would make this possible as she could issue shares to interested investors. Jo would also be able to use the tax benefits of certain investment schemes as an incentive to attract investors. The Enterprise Investment Scheme is particularly attractive because, if investors qualify, they receive both Capital Gains Tax and income tax relief on their investment.
…and the cons
The downsides of a company structure include initial set-up costs (a few hundred pounds) and administration formalities such as the preparation of board minutes and shareholder resolutions.
There is also less privacy afforded to a company than a sole trader business because certain company information has to be filed at Companies House and is available to public inspection. It’s also likely that accounts will need to be prepared by professional accountants at a cost.
Jo will need to be a director of the company so that she can run and manage it; she will be legally obliged to comply with the duties set out in the Companies Act 2006. These duties are similar to those of a trustee and mostly relate to acting in the best interests of the company, which it’s likely Jo would comply with in any event.
Also, while she is the sole director or shareholder of Fitness Match, the risk of liability for breaching these duties is low because it is only her company that can enforce them. The only exception is in an insolvency situation where Jo would have to ensure that she had not acted outside of the interests of her creditors.
An early investment
When Jo starts out, her liability risk is low given that she is simply matching personal trainers and clients. This means she may prefer to operate Fitness Match as a sole trader initially so that she can focus on getting the business going. Once she starts selling sports kit and her own products online, it would be advisable for her to incorporate a limited company to ensure that she is not exposed to any personal liability.
However, if she feels that she can tackle a little extra admin in the early stages, it would be advisable to launch as a limited company straight away. This would provide her with more security, look better to clients and would also give Jo an established platform from which to acquire investors at a later date.
Vanessa Barnett is a Partner at Charles Russell LLP. @vanessabarnett. Image credit: startupstockphotos.com.