Anyone starting a business has a number of key decisions to make. What are you going to sell? Where are you going to sell it? What will your brand say about you?
But one of the most important decisions a start-up entrepreneur has to make is whether to incorporate (ie form a company as opposed to starting a sole trader business). Why would you set up your own company?
1 Separate legal personality from its investors
This sounds like a dry technicality, but it is the separate legal personality of a company that gives it limited liability. In simple terms, this means that as long as there is no fraud involved, no one can sue the shareholders for the sins of the company itself.
2 Being taken seriously
Rightly or wrongly, there is a gravitas that comes automatically with using a limited liability company. The implication is that you are a bigger player than you would be as a one-man band or husband-and-wife team.
3 Taxation benefits
Running your own limited company allows you greater control over your finances, as there are various options open to you to help limit the amount of tax you pay. A good accountant will be able to save you more money when trading as a limited company than if you are operating as self-employed.
4 Ability to attract equity investment
If you are a sole trader or unlimited partnership and want to attract equity investment, drawing up an agreement about sharing profits, losses, rights and obligations can be complex. A limited liability company on the other hand can simply issue more shares to a new investor (after following company procedures).
5 Separate brand identity
If you are already carrying on one form of business, using a limited liability company can ensure that your new venture is kept separate. Creating a limited company also enables you to sell the new venture on (or, if your glass is half empty, wind it up) with less fuss than a non-incorporated business.
If this all sounds complicated, it may not be as difficult as it seems. Companies can be incorporated directly at Companies House or via a formation agent, which may take some of the stress out of the process and give you a friendly face to ask about any questions you have along the way.
- Paul Bryant is a director at company formation agent Set up a Company.