Buying Business

Are you looking to set up a business, but don’t know where to start?

Then you’ve come to the right place.

Below is a brief outline of some of the different structures that can be used to operate a business. Each has its benefits and deciding which one is most appropriate for you will depend on your particular circumstances. If you would like to discuss which of these options is the most appropriate for your circumstances, please get in touch.

Sole trader

As the name suggests, this is a business that can only be run by one person, so is typically used by someone who is self-employed or a contractor (although you can employ other people).

The advantages of choosing this structure is that there are no barriers to getting a business up and running (there is no registration requirement, you can just start trading) and you will be entitled to all profits of the business.

The risk is that a sole trader is personally liable for all business activities. This means that if the business can’t repay its debts, you will need to repay those debts from your personal assets. Likewise, if the business fails to meet its obligations to a 3rd party, you will need to meet those obligation personally or risk that 3rd party taking action against you directly.

Company

Unlike a sole trader, a company has a separate legal identity from the people (shareholders) who own it and the people who run it (directors). This means that if the company has debts and obligations, then generally* it is the company who must repay those debts and meet those obligations, not the shareholders or directors personally.

Other than the limitation of liability noted above, the advantages of a company include:

incorporating a company is a relatively simple and cheap process;
you can have multiple shareholders and directors, which makes it well suited to going into business with others; and
it is the most common business structure which means that advisers and investors are usually familiar with the rules for operating and investing in a company, meaning that it is relatively easy to get advice or funding.

Where a company has multiple shareholders, it is common for those shareholders to enter into a written agreement which sets out how the company will be run. For further information regarding shareholder agreements please click here.

If you decide that a company is the right structure for your business, the company, the shareholders and the directors will be subject to the rules set out in the Companies Act 1993. For example, there are rules around how shares can be dealt with, the information the company must supply to the Companies Office and the duties the directors have while they are running the company.

*we say generally, as you may be liable if you have granted personal guarantees or, if you are also a director and you have breached any of your duties as a director under the Companies Act.

Partnerships

A partnership occurs where two or more individuals or entities jointly carry on a business with a view to making profit. Similar to a sole trader, each partner will be personally liable for all the partnership’s activities, including any contracts entered into by other partners on behalf of the partnership. This means that if the partnership can’t repay its debts, the partners will need to repay those debts from their personal assets. Likewise, if the partnership fails to meet its obligations to a 3rd party, the partners will need to meet those obligation personally or risk that 3rd party taking action against them directly.

The benefit of entering into a partnership is that there are no registration requirements, and you can share the costs of setting up and running the business with your partners. Partnerships are also attractive to some people for taxation reasons. A partnership doesn’t pay tax as a business; it distributes income to the partners who then pay income tax at their specific rate.

A partnership is not subject to the same rules as a company but is governed by the Partnership Law Act 2019. However, partners will typically enter into a written partnership agreement setting out how the partnership will be run. Similar to shareholder agreements, partnerships agreement can be very straightforward or extremely complex depending on each partnership’s particular circumstances.

Limited Partnerships

A limited partnership (LP) can be viewed as a blend between a company and a partnership. Similar to a company, an LP has a separate legal identity which provides its investors (limited partners) with limited liability, but like a partnership the limited partners will have a direct interest in the assets of the LP and will have similar tax treatment to the partners in a partnership.

While these features can be attractive, limited partnerships are more complex than a company or partnership. An LP must have a general partner (GP) and at least one limited partner. The GP is responsible for the management of the business and the limited partners contribute capital to the LP. The limited partners must not take part in the management of the business, however there is often a close nexus between the limited partners and the GP, for example it is commonplace for limited partners to also be shareholders of the GP. The Limited Partnerships Act 2008, which governs the conduct of limited partnerships, sets out a number of specific examples of what is allowed.

An LP must be registered with the Companies Office, however, only the details of the GP will be made publicly available. This provides limited partners with an element of confidentiality that can be attractive.

The downsides of choosing to operate your business as an LP are:

there are more upfront cost in setting up an LP as you’d be required to have a written partnership agreement;
the day-to-day management of an LP can be difficult for some to understand, in particular where limited partners also have a role in the GP; and
Limited Partnerships are less common, more complex and generally less well understood than other structures. This means that there may be less options for you to get advice or funding as there is a small poll of advisers and investors who are familiar and comfortable with the rules for operating and investing an LP.