Q: I am starting a new business with my partner. Would it be best to form a limited company, limited liability partnership or partnership to protect ourselves against any potential losses should the business fail?
Feb 02 2009
Answered by: Clive Lewis Ask a question
You do not give any details of the business you intend to start or your aspirations in terms of business growth and ultimate size, so this answer must be very general. Whether you trade as a partnership or as a limited company is a key decision on starting a business. If the decision is to start as a partnership, it is prudent to review the situation after the business has become established. Basically, a limited company provides opportunities for saving tax but it involves a higher level of bureaucracy which either you must undertake or you pay others to undertake on your behalf.
Limited liability might also be advisable if the business venture is particularly high risk. This may afford some protection from your creditors, although most suppliers will only provide trade credit after taking out credit checks. Otherwise you may be forced to pay in advance or use personal credit cards. If the business requires finance, you may qualify under the Enterprise Finance Guarantee scheme but the bank will need to be convinced of the long-term viability of the business. Forecasts must show that the business is capable of repaying any loans, overdrafts, asset or working capital finance. The bank may request personal guarantees to support its granting finance whether the business format is a partnership or a limited company.
A limited liability partnership (LLP) shares many of the features of a normal partnership – but it also offers reduced personal responsibility for business debts. Unlike members of ordinary partnerships, the LLP itself is responsible for any debts that it runs up, not the individual partners. Suppliers and other potential creditors of LLPs generally require the same level of credit checks as for a limited company. Banks will require the same level of security as for a limited company.
If you opt for a partnership format, you must draw up a partnership agreement covering issues such as the initial contribution each partner makes to the business in terms of cash or assets, the share of profits to each partner, how much each partner takes out as drawings, what authority each partner has to commit the business in making purchases or taking on other liabilities.
You should take as many steps as you can to reduce the risks and test the product or service on real customers to get feedback on it. Do as much research as you can. Using this information, you should prepare a detailed business plan. Experience suggests that new businesses take longer to establish than entrepreneurs plan. They usually require more finance than allowed for. Finally one in three businesses closes within three years of opening.
The decision on whether to trade as a partnership, LLP or limited companies also has significant tax implications.
You would be well advised to discuss your particular circumstances with a chartered accountant who can advise you in detail. To find a chartered accountant, go to the Institute of Chartered Accountants in England and Wales (ICAEW).
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