I’m about to start my own business. What are the advantages of trading as a limited company?

If you’re setting up on your own, you have two options:

1. You can set up as a sole trader. This means you are self-employed - and there is no separation between your business assets and your personal assets. Being a sole trader does not prevent you from employing other people – but it does mean that you, rather than a company, are responsible for them.
2. You can trade as a limited company. This is a separate legal entity, which, in theory, means your personal assets (such as your home) are not at risk if the business fails. However, in practice, you may well find that creditors insist on having personal guarantees.

Trading as a limited company usually involves more admin and costs. However, it can become more convenient and less hassle as you grow your business. One solution is to set up as a sole trader and form a company later, as the business grows.

There are also different tax implications, depending on which business model you follow. You should seek advice from your accountant about which would work best for you.

How do I start a new company?

To set up a company, you need:

• A company name (you must choose a name which is available – you can check this by searching on www.companieshouse.org.uk
• Details of the directors, company secretary and shareholders (including numbers and value of shares – and class of share, if relevant).
• Memorandum and articles of association.

All of this information will need to be registered with Companies House before the company can be set up – and Eric Robinson can help you with any or all of it. You may be able to buy a basic package from a reputable company agent to take care of this process. However, if your requirements are at all complex, it’s usually best to seek professional guidance. And, if there will be more than one owner, it’s a good idea to have a clear shareholders’ agreement drawn up before the company begins trading.

What is a shareholders’ agreement – and do we need one?

There’s no legal requirement to have a shareholders’ agreement. But, if there is more than one owner, it’s usually a good idea. A large part of the agreement’s value is the fact that it forces you to consider issues such as individual roles, growth strategy and how shareholders can leave the business. These can seem like trivial or irrelevant details when you’re starting a company, but they can become the cause of messy disputes if they’re not anticipated and agreed at this early stage.

Are there any advantages in setting up as a partnership?

Like being a sole trader, partnership can be an attractive way for two or more people to start a business, especially if the risks are low. However, as the business grows, it often makes more sense to form a limited company. Some professional firms (such as solicitors) are required to trade as a partnership; a compromise solution for firms like this is to become a Limited Liability Partnership (LLP) – not as flexible as a limited company, but with the protection of limited liability.

I want to sell my business. How can I ensure my staff are looked after?

You can make continuous employment of your staff a condition of the contract of sale. In general terms, if the buyer agrees to keep your employees on, he will have to abide by the terms and conditions that they were employed under at the time of sale. For specific advice about this, or any other aspect of employment law, contact our employment law team.

Will I be able to recover the value of outstanding debts after my business is sold?

This should be specified in the contract of sale. In most cases, the buyer would have the benefit of any outstanding debts, but the value of these would be reflected in the valuation of the business.

If I sell my business, is there anything to prevent me setting up in competition?

In most cases, a contract to buy your business would include a clause to restrict you from running, or being involved in, a similar business. This restriction would usually apply to a specified geographical area (e.g. within 100 miles of the business you’re selling) and for a specified period of time (usually up to two years).

Do I have to pay tax when I sell my business?

If you sell your shares for more than you paid, you will have a liability for Capital Gains Tax on the difference. The amount of tax you have to pay will depend on a number of factors, including how long you have held the shares and whether the proceeds will be invested in another business.

How should I go about selling my business?

This will vary tremendously, depending on the nature of your business and who the likely buyers might be. Like selling a house, your first step should be to ensure the business is in good order and likely to be as attractive as possible to potential buyers. The next step is to market the business – and you might wish to engage an agent or corporate finance advisor to help you with this. Once you have found a buyer, the final step is to negotiate and complete the sale. The buyer will want to carry out a process called ‘due diligence’, to satisfy themselves of the actual value and condition of your business: the more information you can provide at the outset, the quicker and easier this process will be.

We are interested in buying another business, but don’t want this to become widely known. How can we ensure confidentiality?