I'm thinking of starting a new internet company in the UK. Do I need to create a new legal business ?

Hi

There are several different types of business - only one of which is a limited company.. Other alternatives include a sole trader, a partnership, a limited liability partnership and an unlimited company.

If is is just you involved, then the two most common choices are between sole trader and limited company.

Your business format is not set in stone forever and you can change between them. It is fairly simple for a sole trader to take on a partner and become a partnership and for a partnership to become a Limited Company. There are however more complications with changing from a Limited Company to a sole trader or partnership.

Sole trader is the simplest form of business to start where you carry on business on your own account. You are liable to income tax and Class 4 National Insurance on your profits. You can employ people including your spouse, as long as they are paid only for the value of work actually performed

A limited company is a separate legal entity from its owners. These are the basic facts…

The business is owned by the limited company, not you. The company must have at least one shareholder. It must also have at least one director. The shareholders do not have to be directors. Directors are treated as employees of the company, but they do not have to draw a salary from the company. If you are the only shareholder, you will have sole ownership of the company, and are likely to also be the director who runs it. The company pays corporation tax on its profits.

Main advantages of using a Limited Company…

A Limited Company may appear more credible and substantial although in reality this is not necessarily the case.

The liability of its shareholders is limited to the amount of the share capital issued and so offers protection to the shareholders’ personal assets. In the event of company failure and not being able to pay its creditors, your personal assets are protected. However, banks, landlords and others will often require personal guarantees from the shareholders or directors when dealing with small limited companies.

A Limited Company has better borrowing potential than an unincorporated business as it can use current assets as security by creating a floating charge over its assets.

You can use shares to enable different people to hold different proportions of ownership of the business that they can pass onto the next generation.

You can have different classes of shares with different rights, such as non-voting shares for someone who wants to invest some money into the company but doesn’t wish to take part in the management.

Having a limited company can create significant tax advantages by having profits taxed at Corporation Tax rates which are a lot lower than the higher rates of personal tax. However when the funds are extracted from the company extra tax or national insurance charges may arise.

Main disadvantages of using a Limited Company…

Your annual accounts have to be filed at Companies House and are available for public inspection as is other information about the company.

Directors are personally subject to regulations and can be fined or found guilty of a criminal offence for failing to comply.

A company is more complicated to wind up.

Generally involves higher accountancy fees as there is paper work to deal with.

Any losses made by the company cannot be used against the owner’s other income

From a tax perspective, I tend to take the view that a sole trader is fine for a business with profits of up to about £20000-£25000. Above that a limited company offers you noticeable tax savings (and so more money in your pocket).

To start as a sole trader visit http://www.hmrc.gov.uk/selfemployed/iwtregister-as...

If you think a limited company is needed, then you can either do it yourself (see http://www.quickformations.com)/ or through your accountant. Your accountant will cost more but the advice that you will get on how to set the business up and how to structure your pay will make it much cheaper in the long run.

You need a business name. A limited company has to be registered.

You used to be able to buy them off the shelf via Dalton's Weekly etc.

If you don't have a limited company then basically you are personally responsible for all the business debts.

Corporate status makes business names matters easier - you can put the ltd company and registered office address on the website instead of your own