Choose the right form of business

1.1 Consider the level of personal risk you are prepared to take on.

If you set up as a sole trader or as a partnership you will be personally liable for the debts of the business (see section 2 and section 3).

A limited company or limited liability partnership offers some protection against liability for business debts (see section 4 and section 5).

1.2 Consider how much record-keeping you want to do.

The administrative burden is greater for a limited company or limited liability partnership than for a sole trader or partnership.

1.3 Think carefully about the tax implications of the business form you choose.

If you set up a limited company you will be taxed as an employee, whereas as a sole trader or partnership you will typically be treated as self-employed.

The right choice will depend on your circumstances. For many people total tax and National Insurance may be lower if they are self-employed. But high-earners might get tax advantages from retaining profits in a limited company or making pension payments.

Consult your accountant or tax adviser.

It's generally not a good idea to choose your form of business for tax reasons alone.

1.4 Think about how you want your business to be perceived.

Potential clients, suppliers or investors may see a limited company as more credible. Sole traders - although they can employ people - tend to be perceived as one-man bands.

Forming a limited company or limited liability partnership will allow competitors to find out more about you. Accounts must be filed with Companies House and are made publicly available.

People are more likely to support a social enterprise if they are confident it is being run for the good of the community rather than personal profit (see section 6).

1.5 Consider how you plan to develop the business in future.

It is possible to change the form of your business but it is still a good idea to plan for the future.

If you will be seeking to raise finance from a bank or investor to develop the business, your options will be more restricted if you act as a sole trader rather than forming a limited company.

You will need to set up a limited company if you want to sell or pass on shares in the business. This also allows you to give employees the chance to own shares in the business.

2.1 Setting up as a sole trader is the easiest way to start a business.

The administrative burden is far lower than that necessary to set up a limited company. You keep simple, unaudited accounts recording your business income and outgoings.

You can form a limited company later and transfer the business to it, though some stamp duty may have to be paid.

Despite the name, a sole trader can employ people.

2.2 You are generally taxed as self-employed if you become a sole trader.

Income tax will be payable on any profits.

National Insurance contributions are usually lower as a sole trader. However, you will be entitled to fewer social security benefits.

If you are self-employed you must register with HM Revenue & Customs within three months of starting up.

2.3 Remember that you are personally liable for any debts incurred by the business.

Your possessions - including your home - can be at risk if you fail to pay your debts.

3.1 A partnership is a business set up by two or more people, which allows you to share profits, management responsibilities and risks.

As a member of a partnership you will be personally or jointly liable for any debts incurred. This means that if another partner is unable to pay, you become liable for their share of the business debts.

Your possessions - including your home - can be at risk if you fail to pay your debts.

You may be able to raise money by introducing new partners.

Business contracts entered into by one partner can be binding even if the other partners have not consented.

3.2 Members of a partnership are generally taxed as self-employed.

Income tax will be payable on each partner's share of any profits.

National Insurance contributions are usually lower as a member of a partnership than as an employee of a limited company. However, you will be entitled to fewer social security benefits.

If you are self-employed you must register with HM Revenue & Customs within three months of starting up.

3.3 Draw up a comprehensive partnership agreement - this is essential to avoid disputes.

It's a good idea to get a solicitor or professional adviser to draw up a suitable agreement.

A partnership agreement should include the names of the partners, the name of the business and what the business does.

State the date the partnership starts and how long it will last if it isn't a permanent arrangement.

Set out how much capital each partner will contribute.

State how profits and losses will be shared and how much money each partner can draw from the business.

Clarify how the business will be run. For example, how much time each partner is to put into the business, how much each partner will invest, what their responsibilities will be and how fast you want the business to grow.

Set out details of holiday entitlements.

Explain what will happen if partners die, become ill, want to retire or reduce their involvement. Set out what the arrangements will be for introducing new partners.

4.1 Setting up a limited company can reduce the risk of personal financial loss.

Personal risk is generally limited to how much you invest in the business and any personal guarantees given to obtain finance (such as bank loans).

If the business goes into liquidation owing money, any outstanding creditors are paid with money from the sale of the company's assets. Company debts should not affect directors' personal credit ratings.

However, in some circumstances personal liability can still arise. For example, by giving personal guarantees on company borrowings or if it can be shown that a director has traded wrongfully, fraudulently or without due care.

4.2 Your company must pay corporation tax on its profits and you will be taxed as an employee.

Company directors pay income tax on salaries and benefits through PAYE like other employees.

National Insurance payments are higher than for a sole trader or partnership. You have to pay employer's as well as employees' National Insurance contributions on salaries (including those of directors).

4.3 You must register your limited company with Companies House before you can begin trading.

You must draw up a memorandum of association and articles of association (you can use standard model articles provided by Companies House). These set out who is forming the company and how it will be run: for example, how decisions will be made and how shares will be dealt with.

The memorandum and articles must be sent to Companies House along with form IN01.

You must nominate at least one director of the company. You are not required to appoint a company secretary, but you may do so if you wish. It is possible for a director to hold both roles.

Paper registration costs £40, or you can pay an additional fee for a same-day process. Online registration costs £18.

4.4 Consider getting help with registering your company.

You can complete the process yourself to save money on professional fees, but this can be complex.

A solicitor, accountant or company formation agent could help you ensure you get it right first time.

You can speed up the process by buying a ready-made company from a solicitor or formation agent for a fee. A reputable agent may be able to incorporate a company on the same day for a fee.

4.5 You will have administrative costs and obligations once your company is operating.

You must submit annual accounts and tax returns to HM Revenue & Customs.

A set of accounts should also be submitted yearly to Companies House.

You must also submit an annual return to Companies House containing various details of the company and its directors.

You risk a fine if you miss deadlines or submit incorrect information.

Small companies with a turnover of less than £6.5 million do not usually need to have their accounts fully audited. Those turning over between £6.5 million and £25.9 million do not generally need a full audit, but still require a report from a qualified accountant.

You will need to set up a payroll and register as an employer with HM Revenue & Customs.

If you decide to cease trading, it can be more difficult and expensive to wind up a limited company.

5.1 A limited liability partnership (LLP) is a way of forming a partnership while limiting your personal liability for business debts.

An LLP has the organisational flexibility of a partnership. Members share management responsibilities and you may be able to introduce new members to raise money.

Each member's liability is limited to any personal guarantees they have made to secure finance and any money they have personally invested.

Any withdrawals of capital from the business can be clawed back if the partnership is declared insolvent within two years of the withdrawal.

5.2 Bear in mind that forming an LLP is more expensive and complicated than setting up a partnership.

You must register with Companies House, which costs £40, or use an agent to do this for you.

You have to complete and return form LL IN01 to Companies House.

5.3 Members of an LLP are generally taxed as self-employed.

Income tax will be payable on each partner's share of any profits, whether or not they are distributed to members.

National Insurance contributions are usually lower as a member of an LLP than as an employee of a limited company. However, you will be entitled to fewer social security benefits.

Self-employed members of an LLP must register as self-employed with HM Revenue & Customs within three months of starting up.

5.4 You must comply with a range of administrative requirements similar to those faced by limited companies.

Annual accounts must be prepared and filed with Companies House to be made publicly available.

You must also submit an annual return giving details of the LLP and its members.

There is also a requirement to have your accounts externally audited. However, those with a turnover of less than £6.5 million and a balance sheet total of less than £3.26 million are usually exempt. If you are claiming the small companies audit exemption, you are not required to appoint an auditor.

5.5 Draw up a partnership agreement if you are setting up an LLP.

The partnership agreement is confidential to members.

It's a good idea to get help from a solicitor.

See section 3.3 for more information on partnership agreements.

6.1 Consider using an unincorporated association as a simple option.

Unincorporated associations are often used for small sports or social clubs and other community organisations.

You do not have to register the association. The members agree their own rules.

This form may not suit enterprises that have property, employees or complex finances. Members can be personally liable for the association's debts.

6.2 You can use a limited company for a social enterprise.

You can include your social objectives in the company's articles.

Social enterprises that will benefit the community can register as a Community Interest Company.

6.3 Consider the benefits and drawbacks of forming a charity.

A charity must only be run for its charitable purposes, although it can pay its employees.

Charities are normally exempt from most taxes and pay much lower business rates for premises.

Charities must register with the Charity Commission and may need to provide annual returns.

There are restrictions on charities' trading activities.

6.4 If in doubt, take advice.

Professional advisers may give free or reduced cost advice to social enterprises.

Local infrastructure organisations can provide help and advice on setting up a community organisation. Visit www.navca.org/membersdirectory

7.1 As a sole trader or partnership you can trade under your own name (or names) or choose a different business name.

The name you choose must not include the words limited, plc or equivalent.

You might want to check that another local business is not using the same name. Check the Internet and local phone directories. You can also search on Companies House to ensure it is not a name registered by a company or limited liability partnership.

7.2 The name of a limited company or limited liability partnership must be registered with Companies House.

Make sure the name you want to use, or one similar to it, isn't being used by another business in a similar line by checking on the Companies House index of company and LLP names. Remember that this will not include names of sole traders or partnerships.

All company names must end with the words 'Limited', 'Unlimited', 'Public Limited Company' or their abbreviations.

Limited liability partnerships must have Limited liability partnership or LLP in their names.

7.3 You must not choose a name which is misleading or offensive.

The use of certain words - such as 'Royal', 'British', 'Institute' and 'Bank' - is restricted by law.

7.4 Check you are not infringing any trade marks with the name you use.

7.5 Check that the business name you want is also available as a website address.

Even if you do not intend to set up a website now you might want to do so in future.

Nominet is the official registry for .uk domain names. It provides advice on registering and maintaining your domain name.