Daily Archives: 20 September 2010

FAQs when considering the correct legal form for your business

Legal Clarity Logo I have previously blogged on how to Get Legal Clarity on what type of company you should form, and now James Quinn has kindly sent in a list of ten frequently asked questions (FAQs), when customers are setting up in business.

FAQs when considering the correct legal form for your business:

1.    Do I need to register a sole trader business and its name?
No, if you decide to establish as a sole trader then there is no requirement to register your business to bring it into existence, just start trading (the equivalent for companies is registration at Companies House).  However, you must inform HM Revenue & Customs of your self-employed status (information on the pros and cons of setting-up as a sole trader).

2.    How much does it cost?
The legal expenses involved in setting up a company are great – the cost of forming a standard limited company is low and the ongoing compliance costs are usually negligible.  The single largest expense of operating a company is accountants fees – companies are required to file accounts annually with Companies House.  Although technically you could prepare these accounts yourself, it would be inadvisable.

3.    Can I use my home address as the registered office of my company?
Yes, although this means that your home address will appear on the public register.

4.    Do I need more than one person to form a company?
No, you only need one person. Private limited companies can be formed with one director and one shareholder (who can be the same person).

5.    Will running my business as a sole trader gives me more flexibility?
Whilst it may be true that operating as a sole trader allows you to run your business more informally, that does not always equate to flexibility.  For example, operating as a company certainly allows you a great deal more flexibility when it comes to seeking investment or on the sale of your business.

6.   Does a company require a secretary?
No, since 8 April 2008 private limited companies no longer require a secretary (unless, exceptionally, their Articles of Association state otherwise).

7.    Do directors and shareholders have the same role?
This is not the case.  Directors are responsible for the ‘day to day’ running of the company; and shareholders ‘own’ the company and are primarily involved in major decisions concerning the company’s structure and constitution.  The directors and shareholders in smaller companies are often the same people, but it is important to remember that they have different roles and responsibilities depending on whether they are acting as a director or shareholder in relation to a particular decision.

8.    Is there a lot of paperwork associated with a company?
There is some additional paperwork compared to a sole trader business, such as filing an annual return and accounts (although all businesses should keep accounting records in any event).  A company also has to keep Company Registers of shareholders, directors, directors residential addresses, secretaries (if you have one) and charges but these are usually provided on formation and only require updating if there is a relevant change – for example if a director resigns.

9.    Do I need a Shareholders’ Agreement?
No, you are not legally obliged to enter into a shareholders’ agreement when forming a company.  However many businesses with more than one shareholder choose to do so in order to protect their investment in the company and to help resolve any disputes which may arise (Legal Clarity have published a free guide on shareholders agreements).

10.    Do I have to publicly disclose each director’s residential address?
No, since October 2009 directors, shareholders and other officers of the company may provide a ‘service address’ for the public register in place of their residential address.

You can get additional guidance from the Legal Clarity website:
What type of company?
A gentle introduction to private limited companies
Obligations after formation