Choosing a trading vehicle for your business

Modern businesses come in a range of shapes and sizes and take various forms.

With those considering starting a new business or adapting an existing one in mind, this blog looks at the key features of four common trading vehicles: sole traders; partnerships; limited liability partnerships; and companies limited by shares.

If there is a lesson to be learned from the previous year, that lesson is the importance of resilience, particularly for businesses. Selecting the right trading vehicle for your business can act as a solid foundation, key to the business' success.

Sole traders

A sole trader is a person running a business on their own account. A sole trader is solely entitled to the profits of the business but is equally responsible for any losses. There are no formalities required to set up as a sole trader nor do business accounts need to be disclosed to anyone other than HMRC.

While this may seem an attractive prospect, running a business as a sole trader can be a precarious existence, with responsibility for the business' success resting on the trader's shoulders alone. Nonetheless, for many small businesses and occupations, operating as a sole trader may well be the best fit.

A viable alternative to carrying on a business as a sole trader may be to incorporate as a single member private limited company. The key features of limited companies are discussed below.

Partnerships

A partnership is defined in the Partnership Act 1890 as "two or more persons carrying on a business in common with a view of profit".

Perhaps the principal advantage of a partnership is the ease with which it can be established. In setting up a partnership, no Companies House filings need to be made, and no specific paperwork is required. That said, in practice, for clarity and to avoid any future dispute, it is advisable to have a partnership agreement put in place.

As with sole traders, a partnership need not disclose its accounts to anyone other than HMRC, meaning neither the partnerships employees nor creditors are privy to the finances of the business.

However, while partnerships in Scotland do have separate legal personality, the partners will be held jointly and severally personally liable for the debts of the partnership. This means that any creditor may sue the partnership itself, and ultimately the partners personally, for any debts.

The availability of borrowing should also be considered, given that, in Scotland, a partnership may only borrow against the value of the partnership's heritable assets (i.e. any land/properties owned by the partnership).

Limited liability partnerships

Limited liability partnerships (LLPs) were introduced by the Limited Liability Partnership Act 2000 ('LLP Act 2000'). LLPs combine some features of partnerships, and some of companies. The partners in LLPs are called members.

LLPs also have separate legal personality, meaning that the business can hold its own assets, grant securities over those assets, and can sue and be sued in its own right. However, in contrast to partnerships, an LLP has the benefit of limited liability, meaning that the business' liabilities and debts are the responsibility of the LLP, not its individual members. The members of the LLP have financial exposure only to the extent of their capital investment (if any) in the LLP.

However, in the same manner as a limited company, a specified statutory procedure must be followed to incorporate an LLP, which includes registering certain documents with Companies House and paying a fee. An LLP is also subject to ongoing filing requirements, so must publish accounts and comply with other disclosure requirements under the LLP Act 2000.

Companies limited by shares

A company limited by shares can either be a private company or a public company. Some of the key features of all companies limited by shares (whether private or public) are discussed below.

A company limited by shares is a body corporate and has a separate legal personality from that of its owners (known as shareholders). A company can hold its own assets, grant securities and sue and be sued, whilst being responsible for its own debts and liabilities. The liability of each shareholder in relation to the company's debts or other liabilities is generally limited to the amount which remains unpaid on the shareholder's shares.

Companies can also enjoy a separation in ownership and management. This means that shareholders do not need to be concerned with the day to day running of the company. In general, they delegate that power to the directors.

Again, a statutory procedure must be followed to incorporate a company limited by shares which includes registering certain documents with Companies House and paying a fee. Companies are also subject to extensive ongoing filing and disclosure obligations, including publishing accounts. Importantly, all companies limited by shares must have articles of association, which set out the basic management and administrative structure of the company. A company's articles are a public document, which must be filed with Companies House on incorporation.

Choosing a trading vehicle

The above is an outline of some of the key features of four common trading vehicles. In choosing a vehicle for your business, consideration should be given to the freedoms and protections from which your business would benefit. Tax implications will also play an important role in any decision. However, the most important consideration in choosing the right trading vehicle is considering which vehicle will provide the most stable foundation for your business, supporting growth and aiding resilience for the future.