So, you are starting your own agency alone or teaming up with a few contacts. One of the first key business decisions that you make is to choose the best business model for you. To help you decide, we’ve summarised the key features you should know about when choosing your business model – although you will need to take separate advice on accounting and taxation issues!
There is no legal separation between the business and your affairs as a sole trader. As a sole trader, you are personally liable without limit for all of the business’ debts and liabilities. You own all of the assets personally and have full control over the business. There are no formation formalities or filing requirements at Companies House.
How many partners? At least two, and there is no statutory upper limit. Partners are jointly liable for the debts and obligations of the business. A partnership cannot own assets in its own right. The partners are also jointly and severally liable for the wrongful acts or omissions of their fellow partners carried out in the ordinary course of the partnership business, or with the authority of the other partners. Every partner has a right to participate in the management of the partnership and equally in the assets and profits. It is not necessary to register a partnership with Companies House. It is a good idea to have a Partnership Agreement setting out the partners' rights and obligations.
A LLP on the other hand has a legal personality separate from its owners. It can hold assets, enter into contracts and can sue and be sued in relation to those contracts. It is liable for its own debts and the owners have financial exposure only to the extent of their interest in the LLP. A statutory procedure must be followed to incorporate an LLP, including registration at Companies House for which you must pay a fee.
A private limited company has a separate legal personality from its owners, meaning it can hold assets, enter into contracts, as well as sue and be sued on those contracts. It is responsible for its own debts and liabilities. How many? One shareholder is enough and there is no upper limit. There is separation between the management and ownership. Shareholders own the company, the directors are responsible for its management. Directors will often also be the shareholders but this is not a legal requirement! The liability of each shareholder for debts and liabilities is generally limited to the amount unpaid on his shares. A specific procedure must be followed to incorporate a private limited company. This includes registering documents with Companies Housel and paying a fee. There are on-going filing and disclosure obligations.
From a legal perspective, a private limited company is often the best option. If you do incorporate a private limited company, there are benefits in investing in bespoke key company documents such as…
1. Articles of association
All companies must have articles of association, and in the absence of a bespoke document, the Model Articles (prescribed by statute) will apply. The articles of association set out the company’s basic management and administrative structure. This is a contract between the company and its shareholders to regulate the company’s internal affairs. It includes, for example, the issue and transfer of shares, board and shareholder meetings, powers and duties of directors, authority to pay dividends, borrowing powers and so on. It is a public document and open to inspection at Companies House.
2. Shareholders’ agreements
Shareholders’ agreements (in addition to the articles) set out the relationship between the shareholders. It is a private contract, often used to deal with:
Negative pledges, such as restrictions on the directors who are managing the company. This is helpful where the shareholders and directors are different people.
A dividend policy, which has a formula for determining the amount of distributable profits, paid to shareholder’s each year.
It is also possible to include strict restrictions in a shareholder agreement. Such restrictions can prevent a shareholder, at any time when he is a shareholder, and for a specified period of time after, from starting a competing business, enticing away customers, employees or key suppliers etc.
Written by James Worrall, Withy King.
Image by Jake Jennings.
Our Technology & Media Team are experts in setting up businesses in the design and creative sectors. Please contact Jessica Bent at Withy King for further info by email firstname.lastname@example.org or call Jessica on 01225 730100.