To keep it on the KISS (Keep It Simple Stupid) principle, the initial drivers should be the size of the business in terms of value and employment, and the liabilities you face.
Remember though, your professional or business liabilities aren’t the key drivers as you should, regardless of structure, take out business insurance cover. Business insurance can financially protect you for your damages liability, assets and indemnity against unsatisfactory/bad services.
So really, it’s about the size and nature of the business; the structural or more commonly financial aspects of the business.
A micro-business with external funding is usually formed as a limited company to protect investors liability and delivered through a shares issue. Shareholders are then only liable for the businesses debts and losses up to the value of their investment and do not have personal liability.
A small or medium enterprise (SME) who employs several people may seek to limit the liability of the individual owners/executives to redress from the workforce through insurance. In a Limited Company, the Company has that responsibility and shareholders are not liable unless they are also directors (Directors are not personally liable provided they act within the law). We will cover a little about this in the course on limited companies.
While you don’t have to be an accountant and we aren’t teaching you to be one, it is important to know why and when a company may wish to form or become a limited company – limited by shares.
Financially, there are advantages to a limited company as it pays tax at a lower rate to a human person. While you may have a salary from the company, you can also take profits from the company in the form of dividends (a premium paid to all shareholders on a per share basis). Dividends are taxed at lower rate than pay – so this can be a tax efficient way of building the business and getting your returns.
If you start a limited company, you will probably need to employ an accountant to manage the finances.
Simple choice or SWOT?
- Qu 1: Is your company expected to deliver personal earnings, after tax-deductible expenses and purchases, significantly into the higher personal tax bracket?
- Qu 2: Is your company going to raise money from external sources other than ‘friends and family’, bank loans or your own resources?
- Qu 3: Are you going to employ several people (>10) from the outset?
- Qu 4: Are you delivering high-risk services which could lead to extended personal liability and for which specialist insurance would be required – opening a go-kart track, tandem parachuting, leadership/adventure training facility, botox application etc
If you answer ‘no’ to all 4 questions, then it is probably less complicated to start as a sole-trader with business insurance. If your business is successful, you can ‘upgrade’ to a Limited Company later.
If you answer yes to any of the four questions then do our business planning module and try the SWOT analysis – Strengths, Weaknesses, Opportunities and Threats (SWOT):
‘In each of the business start-up courses, you can click through to our helpful guide on how to conduct your SWOT analysis and how to draw your conclusion on business structure from the process.’