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Which legal structure should I use?

Last updated
8th November 2020
Written by
Charles Frank

When starting a new business, you have a few options in terms of which legal structure to use, including:

  1. Run the business as a Sole Trader
  2. Create a Limited Liability Partnership, and
  3. Incorporate a Limited Company.

Which structure you use is down to you, but the limited company is one that we see much more than any other in the early stage sector. Below, we explore why and how to go about setting one up.

Why incorporate?

You could be tempted to run your business as a sole trader – it’s quicker to set-up and cheaper, but there are some compelling reasons why it might not be for you:

  1. The tax efficient schemes provided via SEIS and EIS only apply to incorporated companies - these schemes are a key incentive for many angel investors.

  2. Angel investors will normally only consider investing in 'normal' companies. You may find an inexperienced investor or family member to invest into a different structure, but few seasoned investors would consider this.

  3. Most importantly: to limit your personal liability. If you operate as a sole trader, you literally risk everything. If you incorporate as a limited company and the company fails to deliver on a contractual commitment, then it can be sued. If it loses in court, this could result in a financial judgement that the company can't settle - the company would close and you would learn a painful lesson. If the same situation occurred in a sole trader scenario, then the outcome could be much more significant as you are not trading with limited liability. Without this protection, your personal assets, including your home, are potentially at risk and in a worst case scenario you could be declared bankrupt.

How to incorporate

Once you have the relevant information to hand, there are many online incorporation agents you can use to create your company, who are usually low cost and keep the process as simple as possible. Examples include:

  1. 1st Formations
  2. YourCompanyFormations, and
  3. Company Formations 24-7.

All of these companies can get you up and running, via their basic package, for £15 or so.

You will need to provide some basic information that we discuss below.

You'll need

To incorporate, you’ll need:

  1. A company name. See our blog post for our thoughts on this.
  2. A registered office address (see below).
  3. Details for each director: full name, date of birth, occupation, nationality, home address (which, as above, doesn't go on the public register) and a service address (which does – see below).
  4. Details for each shareholder: full name, date of birth, nationality and address. You need to provide 3x security questions/answers, such as the first three letters of your mother’s maiden name, your father’s forename and your town of birth.
  5. You will need the details of any company secretary (same as 3 above), although bear in mind that a company secretary is no longer required.
  6. You will need to declare and provide details on any ‘person with significant control’ (PSC) in relation to the company.

What address?

You'll need at least two addresses - your company’s registered office address and a ‘service address’ for each director. The service address, which is used for formal notices from Companies House (and potentially others) to directors, can be the company’s registered address, but it must be somewhere you have access to. If you have an existing business address you can use, then great - you can change these in the future anyway.

Assuming you don't have an existing business address available, then you could use your home address, but this is generally avoided as the information is a matter of public record. You will have to provide your homes address to Companies House as part of the incorporation process, but they are required to keep it confidential.

Many startups choose to use a virtual office address - there are plenty of these to be found using an internet search and you can choose either somewhere local to you (i.e. convenient to pick up your mail) or a more prestigious address, for example in a large financial district.

There are lots of providers out there and a quick Google search will come up with many options.

Good luck!

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