How to choose a legal structure for your business
Making the decision to start your own business is the first of MANY that you will have to make during its lifetime. The decisions that you make in the early stages are of the utmost importance, so take time and professional advice where necessary and make the right choices. One of these big decisions that sooner rather than later you will have to make is to define the business structure for your fashion start-up.
There is an abundance of information on the differing business structure options, which sometimes can be overwhelming. What matters most, however, is what makes sense to your business.
Keep it simple and ask yourself some key questions like:
• Are you looking for any benefits/protection/limited liability?
• What legal implications will make the most sense to your business?
• Who will be maintaining your books and records?
Though the fashion industry is different from many others, the business guidelines of the different structures remain largely the same. There are three main structures that most businesses will fall under:
• Sole Trader/Proprietor
• Limited Company
Below is an outline of the main differences and responsibilities attached to each one, as well as the most obvious advantages and disadvantages of each.
This is perhaps the simplest and easiest way to start a business. No legal formalities are required and as the name suggests – the business is started and owned solely by you. This means that you are personally responsible for any losses your business makes.
The advantages here are that you are in total control and in charge of your business. There is no need for filing accounts for public inspection – any income earned by you or the business is yours, and income tax is paid on it accordingly. You will still need to register yourself as a business proprietor and obtain a sole trader business number, but the costs associated with this set up are negligible.
The main disadvantage here is that if the business runs into trouble, you as the sole business owner are responsible and liable for any debt or losses incurred. Personal assets will be taken into an account when trying to settle debt.
Many designer businesses start this way, but later on – usually within three years if the business is still operational – they convert the business structure to another, often a limited liability company.
Some people do not like the thought of being on their own, especially in a business situation and set up a business with another person or persons.
Legally, two or more people working as self-employed and together with the aim of making profit, will be seen as being in a partnership.
Much like the Sole Trader set up – a partnership is a business structure where ALL of the partners are personally and equally liable for any loss the business or an individual partner makes. No annual accounts filing is necessary.
An important aspect to consider here would be the drawing of a contract/agreement between all the partners, stating clearly the terms by which the partnership will operate.
Basic matters should be covered such as:
• How much money each partner will contribute to the business
• How would profit and loss be divided
• What decision-making abilities does each partner have
• Day-to-day responsibilities of running the business for each partner
• What happens in the case of a partner wishing to leave the business (or in the event of death).
What may seem like ‘no-brainer’ at the start, can become a real problem later on. To avoid this situation, seek legal advice early on and outline everything in a contract.
Private Limited Company
Most businesses ultimately end up being registered as Limited Companies. The ‘limited’ extends to liability and ownership shares.
In this scenario, a company is classified as being a separate entity to its owner and directors. It is a vehicle under which an individual or a group of people do business.
The main difference and advantage to this structure is that any loss or liabilities incurred belong to the company, and not the owners/directors.
However, running a limited company is more complicated, timely and costly compared to Sole Trader or Partnership. The company must be registered as one with Companies House, directors and a company secretary must be appointed, and annual accounts must be prepared and filed.
Regardless of what you may read and think, consulting a qualified professional accountant – ideally with knowledge of the fashion industry – is advisable and could save you from expensive mistakes further down the line.
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