Trading places

Before trading begins, it is important to consider the legal form under which you will conduct business. There are four types of legal entity that can be set up in the UK, the most relevant of which is a limited liability company (Ltd). We will briefly discuss the other forms (a sole trader, partnership and cooperatives) for completeness.

The limited company

In this form of business your liability is limited to the amount you contribute by way of share capital. It is an independent legal entity and is separable from its owners, managers and employees. If the company fails therefore, any shareholders are not liable beyond the paid up value of their shares and creditors claims are only applicable to the assets of the company. In reality, this practice does not give enough security to lenders and you may be required to offer some guarantee (personal assets) to cover part of the loan. The limited liability company has a wider range of financing options when compared to other business forms. In particular, this can be by selling shares or creating a floating charge over its assets by selling debentures. Thus to summarise, the advantages of a limited liability company are: (a) it is a separate legal entity; (b) your personal assets will be protected (up to the value of your personal guarantees if you have given them); (c) there is a wider variety of security on offer; and (d) there are tax advantages upon which a specialist tax accountant will advise.