LEGAL advice from Eleanor Woodall, FDR Commercial, Bold Street, Warrington.

Question I am setting up a new business with a friend, should we register as a partnership or as a private limited company?

Answer Firstly congratulations on your new business venture.

When starting a new business it is important to understand the main differences between the two types.

A private limited company is a legal entity, run by directors and owned by shareholders. Often in smaller companies these are the same people. Limited companies are required to register at Companies House and data including the identity of directors, shareholders and financial accounts is publicly available.

A partnership comprises of two or more people sharing the right to make business decisions and in the net profits. They are also responsible for debts and obligations without limit. Private limited companies have reduced risks, as liabilities (debts) are separate from the owners.

Both business models have tax advantages and disadvantages and we would strongly advise you to contact your accountant to discuss these further. Partners are required to register as self employed with the Inland Revenue, and are taxed on their share of the partnerships profits. In comparison a private limited company is responsible for paying corporation tax, and directors must pay national insurance contributions alongside income tax on salaries.

For a start-up limiting personal liability may be more attractive, however it requires more work and costs i.e. filing of accounts; annual returns; corporation tax returns and paying income tax.

Whether a limited company or a partnership you should have a legal contract. In a partnership this would be a written partnership agreement, outlining your relationship, requirements, responsibilities and the sharing of profits and losses. In a company as well as the Articles of Association you should also have a shareholders’ agreement to govern the relationship between shareholders and to provide for an exit strategy.

  • For further advice on the different business models and accompanying contracts contact me at Eleanor.Woodall@fdrlaw.co.uk or on 230000