smallbusiness.co.uk: Helping your business think big

There are various options available to you, each with their own advantages and disadvantages, therefore the business form you decide upon will have much to do with your individual circumstances. Bear in mind, however, that as Business Link for London's Nigel Lander asserts "the question of what legal entity to use for a new business is a complex one and wider issues than finance raising should be considered before coming to a decision.”

Setting up as a sole trader is by far the simplest option as all you really need do is register with the Inland Revenue within three months of launch. They, in turn will notify Customs & Excise.

It is this simplicity that is the main benefit of setting up as a sole trader. The other big advantage is that the accounts you produce at the end of each year can also be fairly simple.

The limitations, however, are numerous. As a sole trader you are personally responsible for any losses your business incurs, you are also likely to find selling the business difficult at a later stage and perhaps most pertinently of all, your funding options may be slightly more limited.

As a limited company you will be able to sell shares in order to raise money through private equity, and this is likely to become increasingly important as your business grows.

But with the most common forms of funding – bank loans for instance – your business' form will, as Lander suggests, have little relevance. Considerably more important are issues such as "how much you are putting into the business in relation to what you are seeking to borrow, the quality of the business plan, and the sector experience and ability of the management."

The other big benefit of becoming a limited company – aside from the additional gravitas many feel such status brings – is that your business will effectively become a separate legal entity. This affords you (the director) considerable, though not absolute, protection should things go wrong. "Legislation more and more is making directors accountable for their actions," Lander explains. "Equally, if the company looked to raise finance, inevitably the directors would be asked to provide personal guarantees."

Remember too that setting up a limited company will cost you. You will be required to register with Companies House and are then obliged to send in annual accounts, which will be available to the public. All in all, setting up a limited company will cost somewhere between Ł20 and Ł80 upfront if you do everything yourself or up to Ł200 if you enlist the help of an adviser – a solicitor or accountant, for example.

As a start-up, forming a public limited company (or PLC) is unlikely to be worthwhile at present due to the far greater costs and financial reporting standards.

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