Internet Marketing Business Entities – Trading Legally

Phil

Following on from my post a few weeks back I wanted to talk more about staying “legal” when setting up your online business. Now, most of this is primarily UK law, seen as though that’s where I live, but in most cases it can be applied in most countries, although it would be worth checking with local business organisations outside of the UK just to be on the safe side.

And so, you’ve set up an online business. In order to run your business legally it needs to have a structure. This will put you on a proper footing with HM Revenue & Customs and your local authorities. It’s worth thinking very carefully about the kind of structure you choose, in order for that structure to best suit your business model.

The type of legal structure you choose will have a direct affect on:

• The tax and National Insurance that you pay
• The records and accounts that you will have to keep
• Your financial liability if the business runs into trouble
• The ways your business can raise money, and
• The management decisions that are made about the business

There are several structures to choose from, depending on your individual situation, but if you are not sure which structure would best suite your business then it is worth seeking advice from an accountant or solicitor.

Self-Employment

To be a Sole Trader, a Partner, or a member of a limited company, you must be self-employed, and as such registered with HM Revenue & Customs (HMRC). This doesn’t mean that you can’t also do other work as an employee, but the work you do for your own business must be done on a self-employed basis.

Sole Trader

Being a Sole Trader is without any doubt the easiest way to run a business. It doesn’t involve paying any registration fees, keeping records and accounts are very straightforward, and you get to keep all the profits from your business. However, an important thing to understand about this simplest legal structure is that you are personally liable for any debt that your business runs up, which makes this a risky option for businesses that need a lot of investment.

Partnership

In a partnership, two or more people have a share in the risks, costs and responsibilities of being in business. Each partner is self-employed and takes a pre-agreed share of the profits (usually equal). Normally, each partner will share in the decision making and is personally responsible for any debts that the business runs up.

Unlike a limited company, a partnership has no legal existence distinct from the partners themselves. If one of the partners resigns, dies or goes bankrupt, the partnership must be dissolved – although the business can still continue.

A partnership is a simple and flexible way for two or more people to own and run a business together. However, partners do not enjoy any protection if the business fails.

Limited Liability Partnership (LLP)

A limited liability partnership (LLP) is similar to an ordinary partnership, in that a number of individuals or limited companies share the risks, costs, responsibilities and profits of the business.

The difference is that the liability is limited to the amount of money they have invested in the business and to any personal guarantees that they have given in order to raise finance. This means that members have some protection if the business runs into trouble.

Limited Liability Company

Limited companies exist in their own right. This means that the company’s finances are separate from the personal finances of their owners.

Shareholders may be individuals or other companies. They are not responsible for the company’s debts unless they have given guarantees – for example, a bank loan. However, they may lose the money they have invested in the company if it fails.

There are three main types of Limited Liability Company:

• Private Limited Company
• Public Limited Company
• Private Unlimited Company

Franchises

Buying a Franchise is a way of taking advantage of the success of an already established business. As a ‘franchisee’ you buy a license to trade using a particular name, products, services and management support system, provided by the ‘franchisor’ company. This license normally covers specific geographical areas and run for limited periods of time, after which it should generally be renewable as long as you meet the terms of the franchise agreement.

The way you pay for a franchise may be through an initial fee, ongoing management fees, a percentage of your profits, purchase of goods from the franchisor, or a combination of all of these.

A franchise business can take different legal forms, although most are sole traders, partnerships or limited companies. Regardless of the structure, your franchise business will be limited by the terms of the franchise agreement.

Social Enterprises

A social enterprise is a business with primarily social objectives. Any profits are largely reinvested in the business or in the community, rather than given to shareholders and owners.

There are many different types of social enterprises, including:

• Community development trusts
• Housing associations
• Worker-owned co-operatives
• Leisure centres

Advantages and disadvantages

Sole trader

The advantages of being a sole trader include independence, ease of set up and running, and the fact that all the profits go to you.

The disadvantages include a lack of support, unlimited liability and the fact that you are personally responsible for any debts run up by your business.

Partnership

The advantages of being in a partnership include its ease of set up and running, and the range of skills and experience that the partners can bring to the business.

However, problems can occur when there are disagreements between partners. There is unlimited liability and, as a partner, you are personally responsible for any debts that the business runs up.

Limited liability partnership (LLP)

LLPs retain the flexibility of a partnership and your personal liability is limited. At least two members must be ‘designated members’ – the law places extra responsibilities on them.

The formation of an LLP is more complex and costly than that of a partnership and problems can occur when there are disagreements between the members. If the number of partners is reduced, and there are fewer than two designated members, then every member is deemed to be a designated member.

Limited liability company

In a limited liability company your personal financial risk will be restricted to how much you invest in the business and any guarantees you have given in order to obtain financing.

However, you should remember that this type of company also brings a range of extra legal duties, including the maintenance of the company’s public records, eg for the purpose of the filing of accounts.

Franchise

The major advantage of a franchise is that it takes advantage of the success of an established business and support networks.

However, your freedom to manage the business is limited by the terms of the franchise agreement. Also franchisees often pay a share of their turnover to the franchiser, which reduces overall profits.

Social enterprises

Social enterprises are businesses that trade for a social purpose and represent a diverse and growing range of business activity across the UK.

You can find more detailed help and information on the HM Revenue & Customs website at http://www.hmrc.gov.uk.

Phil has had many other businesses including Coaching, Marketing and PR, Graphic and Website Design, and Online Learning. His current venture is Phil Johnson Business Services, providing low-cost essential services to the newly self-employed and small and medium enterprises. Aside from this Phil runs Major-Business.net, a free source of quality help, advice, tips and tricks on many business and personal development subjects, catch Phil on Twitter
photo credit: photonichelle