When setting up a new business there are many things to think about but probably the first key thing to decide on is what kind of business do you want to set up – which business entity will work best for what you want to achieve?
When deciding on the type of business you want to create, there are a number of factors to take into account and it is advisable to seek legal advice from your accountant as there are tax implications depending on which option you choose, and from your solicitor to make sure you fully understand the differences and implications.
Fortunately, the team at Crunch have given us some guidance to help you decipher what type of entity would suit your business. Check out the bullet points below and see which category your business falls into.
One of the aspects to think about is what type of business you are setting up as some will work better as different entity types, than others.
Generally speaking, there are four main different types of business:
A service business
A service business is one which sells services rather than products, such as professional skills, advice, help and support or expertise. Service companies include businesses like accountants, solicitors, financial institutes and repair garages.
A retail business
Retail businesses sell products. They buy them in bulk at wholesale prices from third party suppliers and sell them on for a profit. They make money by selling the products for more than they paid in the first place. Examples include grocery shops, supermarkets and other kinds of shops.
A manufacturing business
A manufacturing business is one which actually makes the products themselves and then sells the goods produced on to customers. Manufacturing businesses include raw materials and production processes. Examples include factories and car manufacturers.
A combination business
Some businesses don’t fit into any of the above categories as they combine several of the processes, for example, a restaurant creates food, offers a service and sells products so it has aspects of all three.
Once you know which business type you are planning to run, and you have your legal and financial advice regarding the suitability of the different types of structures, the next step is to look into the different types of business entities and which might suit you best.
There are five types of legal business entities to choose from:
Sole Trader
A sole trader is the most common set up for small businesses – it means they are owned by one person and is the cheapest and simplest way to set up a business. Many companies start out as sole traders and then move to become limited companies as the business grows.
The business is connected directly to the owner including finances and liabilities, so as a sole trader, the owner is directly linked to the business so if it fails or has financial difficulties they are held personally responsible.
Limited company
A limited company is the next most common set up for small businesses and provides more protection than setting up as a sole trader. A limited company is a separate entity from the business owner so that provides some protection to the owner if the business has financial difficulties. Setting up a limited company costs money and involves more paperwork than a sole trader.
A partnership
It might be that you wish to set up a business with a partner in which case your business will become a partnership. This is a business owned by two or more people who all contribute resources and divide the profits between them.
A corporation
A corporation is a business which has stockholders who own shares in the business. This is often the next step from a limited company, once the business is successful and making a significant profit.
The shareholders have limited involvement in the company’s operation as corporations are generally run by a board of directors which controls the activities of the company. Any type of company can become a corporation.
A co-operative
A co-operative is a type of business entity which is owned by a whole group of people and works for mutual benefit with the owners all known as members. There are a range of businesses which can be co-operatives, including banks, supermarkets and utility companies.
Summary
As you can see there are many different types of businesses and ways to set them up, all of which have been proven to work successfully through time. It’s a case of deciding what your business is all about and which type of set up will work to your best advantage.
Each different business entity has different tax implications and different liabilities for the owner so it’s important to get it right. It’s also worth mentioning that many businesses start out as one type and then evolve over time as they get bigger. It’s common to start as a sole trader before moving to become a limited company and then involving shareholders further down the line.
More on how to register as a sole trader and limited company benefits.
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