What Type of Company?
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Holly Fulton, AW12
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Business Structures
A decision that will need to be made at a relatively early stage is the structure your business will take. There are three main options available and each one has different levels of responsibility attached to it. The following shows the different structures and indicates the main advantages and disadvantages of each.
Take advice on the appropriate business structure for your purposes. It is be advisable to speak to an accountant who has knowledge of the fashion industry.
1. Sole trader
Becoming a sole trader is perhaps the easiest way of starting up in the
fashion business. No legal formalities are required and there are few
legal restrictions as to when you can begin trading. An individual who
operates as an owner and runs a business on his/her own account, with or
without employees, is termed a 'sole trader ' or ‘sole proprietor’.
- There are no statutory requirements governing the format of your
accounting records and there will be no need to have an annual audit of
the accounts or to file them at Companies House for public inspection
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Although there may be a degree of involvement from financiers, you
will have personal control of the business but will be personally
responsible for its liabilities
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There is no difference between a business debt and a personal debt
and therefore a creditor, having obtained a court order, would in theory
be quite entitled to take possession of your personal property,
including possibly your home, if the business had insufficient funds to
pay its debts
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You need to ensure that your name, as the proprietor of the
business, with an address in Great Britain where documents may be served
on you, is set out on all business correspondence, invoices etc and
displayed at your place of business. It is advisable to contact an
accountant who will be able to complete and file the necessary forms for
you. The set up costs associated with setting up a sole trader business
are negligible
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One disadvantage of not forming a company is in relation to
providing security against which you can borrow funds. Unlike a company,
as an individual you cannot create a floating charge over all the
assets used in your business (for example, your customer debts, stock,
fixed assets and so on), something which banks find difficult to accept
-
For taxation reasons, it may be worth starting as a sole trader or
partnership and then converting to a company at a later date. This is a
relatively cheap route whereas the reverse may prove costly and
confusing.
2. Partnership
A simple definition of a partnership is when two or more self-employed
people work together in a business with a view to making a profit.
Some key points to note here are:
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The legal position is not that different from a sole trader in that
the partners are personally liable for the firm's business debts.
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A partner has a legal right to be involved in the management issues
of the partnership and can commit the partnership to contracts on the
firm's behalf.
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If one partner incurs business debts, the other partners are liable
even if they know nothing of them. Each partner is jointly and
severally liable for all business debts (so if your partner vanishes,
for practical purposes you are liable for all the debts).
- As in the case of a sole trader, a partnership is not required to
have annual accounts audited or to file them formally at Companies House
for public inspection.
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A partnership is not required to register itself on creation with the Registrar at Companies House.
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It is advisable to contact a solicitor to help draw up a specific
partnership agreement before starting to trade. This agreement is an
essential document as it will set out the necessary rules by which the
partnership will operate. Possible disagreements over quite basic
matters such as profit share arrangements, funding
responsibilities, and issues on retirement and new partners can thereby
be prevented.
3. Limited Company, privately owned
The vast majority of business organisations in the UK take the form of companies limited by shares.
What is a Ltd company and what is the main advantage over a partnership or sole trader business?
Unlike a sole trader or partnership, a company is classified as being a
separate entity from its owners and directors. One of the most common
reasons and advantages for setting up a limited company is that a
company can be sued by a third party in its own right. This means that
the individual directors and shareholders cannot be sued for their
personal assets.
There are really only two exceptions where a director can be held
personally liable for business debts. The first is where he has traded
improperly or fraudulently and the second is where he has given personal
guarantees.
In contrast, for partnerships and sole traders, each partner or trader
has unlimited liability and risks his personal assets if the business
is sued by a third party.
The structure of a limited company is more complicated to set up than a
partnership or sole trader business. It is advisable to seek advice from
your accountant or solicitor to help with the process. In order to set up a company, certain documents need to be prepared and
sent to the Registrar of Companies for approval. There also needs to be a
minimum number of officers of the company at the beginning and
throughout its existence.
The cost of a company formed from scratch involves legal fees in
drafting the memorandum and articles of association together with
printing costs and the costs of the statutory records. A registration
fee of £20 is payable on registration of a limited company incorporated
in the United Kingdom. It is possible to buy a company 'off the shelf’ from a registration or
formation agent. Often firms of solicitors and accountants act as
registration agents. The agent will provide a registered company that
has already been set up but has not yet traded. The company documents
will need to be amended and tailored to your company's particular needs.
Typically the costs of purchasing such a company are in the region of
£150 plus. By European standards, limited companies in the UK can be
formed very quickly (usually within ten days) and inexpensively.
In order to comply with legislation, companies are required to file
certain documents. These documents are filed with the Registrar of
Companies at Companies House and are available for public inspection. Companies House is a central place where documents and annual accounts
for all companies are filed. Anyone may request to see the documents of a
company. The purpose of such level of openness is to protect creditors
by giving them access to information and is the trade-off for limited
liability.
There must be a minimum of one director and one company secretary. A
director may also be the company secretary if there is at least one
other director of the company. The company secretary is responsible for maintaining the statutory
records, ensuring they are up to date and that minutes of all meetings
are recorded and filed. In general, they are responsible for handling
the administration of the company and ensuring compliance with legal
requirements.
The directors are responsible for the day to day management of the
company which is delegated to them by the shareholders. A director may
also be a shareholder. There are no specific qualifications required to become a director of a
company, just to be of sound mind! You cannot be a director if you are
an undischarged bankrupt. Directors can be appointed or removed by the shareholders at any time
throughout the year but there are strict guidelines and procedures that
need to be followed. It should be noted that a director has numerous legal responsibilities
towards the company and these represent a huge burden on a day-to-day
basis for the individual. These responsibilities should not be
underestimated and before starting up a company you should make yourself
aware of what is required. There are too many responsibilities to mention here but further
information about a director's responsibilities can be obtained from
your chosen firm of accountants, solicitors or from Companies House.
The money you invest in the company at the beginning of the venture is
known as 'Share capital'. This is also commonly known as 'Equity'. Most companies only issue one class of share but shares may be of
different classes, differentiated by reference to voting, dividend and
other rights. It is best to personally retain at least 51% of the company to secure majority voting rights. Shareholders are registered and issued with a share certificate. Shares
are normally freely transferable unless the company documents give the
directors specific discretion to refuse a transfer.
As well as submitting Annual Returns, all limited companies must also prepare accounts on an annual basis. It is common practice for a company to prepare accounts on a more
regular basis throughout the year in order to be able to review how the
business is doing as the year progresses. It is only the accounts for the year ending on your chosen and
registered accounting date that need to be filed at Companies House.
These need to be signed by the auditors and directors and filed within
10 months of the company's year end.
Unless your company qualifies for an exemption, you must have the
accounts audited on an annual basis by a registered auditor. These
exemptions are only usually granted on the grounds of being small in
size of turnover, number of employees and assets. Below £350,000
turnover, you will not require an audit.