Choosing the right business structure for your second business
If you are thinking of starting a second business and are wondering how to structure your second business, you have the following options:
Incorporate separate limited liability companies for each business? Operate as a Sole trader? Adopt a trade name to run different business ventures (i.e., “Trading As…” or “Doing Business As” (DBA) )under one limited company? Form a partnership (Unlimited partnership or a Limited Liability partnership) ? Have a big umbrella company (i.e., parent company) to hold the other companies as subsidiary companies?
We look at the pros and cons of each business structure below.
1. Incorporate individual companies for each business venture
Should you create separate companies for each business?
First, there is no limit to how many limited liability companies you can set up. Many business people elect to set up a new company for each of their start-up ventures. For example, you can form a limited liability company for your printing business, another limited liability company for your travel business and another limited liability company for your accountancy business.
The main benefit of creating individual companies for each business is that as each individual company has a separate legal personality with limited liability, you are reducing the risk to each individual business if one of your businesses were to face hard times. So, if for example a client were to sue your printing business , your accountancy business will be protected. Further if in the future your printing business were to make losses due to for example bad economic conditions your travel and accountancy businesses will be protected as they will not have to share in any of the liability.
The main disadvantage with this option is that you will incur additional administrative fees and more paperwork. For instance, you will have to pay a fee to Companies House to incorporate each business. You are also obliged to pay annual confirmation fees and lodge VAT returns, annual accounts, tax returns and other corporate forms for each company. You may not want to do this but when you think about this it may well be that the additional fees that you have to pay may end up being cost-effective as it will help you to shield each individual business or investment from the others thereby reducing the risk of any of the assets of your other businesses being used to compensate creditors if one of your businesses were to go bust or if a creditor were to put in winding-up petition against one of your companies. So, if for example your travel business is being sued, your printing or accountancy businesses will be protected as they are both separate companies and their liability is limited.
2. Operate as a Sole Trader i.e., adopt a Trade Name to run the different business ventures as a Sole Trader
With this option you can set up different business ventures under several “Trading as Names” as a Sole Trader.
This is the most popular way of starting a new business in the UK as it is the quickest and easiest way to get your business up and running. Set-up costs are low and you do not have to register a company with Companies House, thereby avoiding a lot of paperwork.
Further, as a sole trader you control your business and do not need to consult other directors or shareholders about the business meaning that you can set your vision for the business and develop the business as you wish. As you can make decisions on your own it can be simple and quick to make changes to the business or adapt the business to changing circumstances. However, you will need to inform HMRC that you are self-employed and are operating as a sole trader.
In addition, the accounting process is simpler for sole traders than for limited companies – but please note that even though you do not need to file formal Annual accounts or a Corporation Tax Return you still have to keep records of your invoices and expenses.
Another advantage is that you do not have to file a confirmation statement or other forms that a limited company may need to file eg when appointing or removing directors. You also get some tax allowances on business expenses and assets like limited companies do, retain all the profits from your business without having to share the profits with other shareholders or leave the profits in the business. In addition, a sole trader’s financial information is kept private unlike a limited company’s accounts which are published online.
A main disadvantage is that this option puts you at risk of losing your assets as you are solely liable for your business’s debts. Therefore, if your business fails and there are outstanding debts you are personally liable for those debts and may well lose your home as well as face bankruptcy.
In addition, as a sole trader it can be difficult to obtain finance to expand your business.
Further, sole trader businesses are not as highly regarded as limited companies as they are perceived as lacking the prestige of a limited company. Some people and companies or organisations prefer not to deal with sole traders (sometimes pejoratively called one-man bands”).
The tax planning advantages for sole traders are also limited and a sole trader may not have the support of someone else to help run the business if the sole trader is sick or wants to take a holiday.
3. Adopt a “Trading as Name” or “Doing Business As” (DBA) for each business venture under one limited company
Another option would be to adopt a “trading” name or “trading names” to run your second business venture under your first business’s name. A “trading as name” or DBA is a name chosen by a business that differs from their registered company name. The DBA name is never officially registered at Companies House.
In this case you will create one limited liability company and then set up different business names (“trading as …”) for each of the other ventures. This is quite common as there are several limited companies which run multiple businesses with various “trading” names all under the umbrella of the same company.
From a trading perspective, you can use each individual business name, have separate bank accounts for each business, accept cheques written to each business and can generally run each business as if they are individual companies.
The advantages of this approach is that with this option, each of your business ventures can utilise the same company name and their own branding and you can pay one set of annual company fees for your first business and not each individual “Trading as” name and use one Employer Reference Number (ERN).
In relation to your tax returns you just take the earned income from each DBA and report them in a single tax filing under the name of your first business.
Further each DBA business venture will be legally protected by your main limited liability company. So, if for instance one of your “trading as” business ventures were to be pursued for a debt your personal assets will be shielded if you filed the DBA under your limited liability company.
Please also note that if you decide to use a Trading as Name you cannot opt to just use your Trading as Name as the law provides that you must display your registered business name on receipts, signs, and other business documentation.
However, there are some disadvantages. First, your trading name cannot be the same as or like another company or business name in a way that might be confusing. In the same way that you cannot register a company name with the same name as a company that is already registered you also cannot register a company name which is totally different then use a trading name which is the same as an already registered and trading company name.
You may get away with it if the other company decides not to challenge your use of the same name. However, to protect our clients we usually recommend that clients carry out a Company House search and a trademark registration search to ensure that their chosen name is not already registered at Companies House, registered as a trademark at the Intellectual Property Office (IPO) or is in use by another business or company irrespective of registration.
In addition, because a trading name is not registered as a limited company it is not properly protected under the law. There is therefore the danger that someone else may decide to register your trading name as a limited company and then assert a right to that name. This could pose problems for your business as if they have registered the name at Companies House, they can force you to stop using that name.
We therefore usually advise clients to form a company using the trading name, register the trading name as a limited company then keep that company dormant. This may at first sight appear to defeat the purpose in using a trading name, but dormant companies are non-trading, their registration fee is low cost and administration of a dormant company is relatively straightforward.
As an alternative to registering your business name as a dormant limited liability company it may be more beneficial for you to register a trade mark for the trading name instead as if someone later decides to register a limited company in the same name as your “trading as name”, you are protected by the Intellectual Property (IP) law of “passing off” which would stop the new company using the “trading as name” for their limited liability company.
4. Form a Traditional partnership
Partnerships may be formed intentionally or unintentionally. The only legal requirement with a partnership is that each partner must register as self -employed and submit a separate tax return. The partners have to agree on how they want to split the partnership’s liabilities, ownership and profits of the business and what they want to happen if one partner wants to leave. These should all be set out in a partnership agreement.
This option is recommended if you are going into business with people you know well. As there are two or more partners the business will not fail if one of the partners goes on holiday or becomes sick.
The main disadvantage is that in a standard partnership all the partners are responsible for all the partnership’s busines debts whether or not the debt was incurred by one partner or by any of the other partners acting on their own without your knowledge. It is therefore important that you know the people that you intend to enter into partnership with very well.
5. Form a Limited Liability Partnerships (LLP)
LLPs are a hybrid between limited liability companies and traditional partnerships. The number of partners is not limited but two partners must by law be ‘designated members' responsible for filing annual accounts. LLPs are suited to professional service companies eg law firms and accountancy firms.
Like a limited liability company LLPs have limited liability and the model protects its members' assets, limiting their liability to a member’s investment in the business and any personal guarantees the member may have given when raising loans on behalf of the partnership.
However, the tax advantages are not similar to those given to limited liability company shareholders as each member has to register with HMRC as self-employed. Further each member’s share of the profits is taxed as income. LLPs also have to register at Companies House and there should be a members' agreement stating what share of the profit each member should receive. The partners have to agree on how they want to split the partnership’s liabilities, ownership and profits of the business and what they want to happen if one partner wants to leave. These should all be set out in a partnership agreement.
If the business you are starting is in the financial services space, for example, and you are hoping to grow it by attracting other professionals to join you it may be worth considering an LLP from the outset. It has been adopted with enthusiasm by some of the largest accountancy and law practices in the UK.
6. Establishing subsidiary businesses under a Parent ( Holding) Company
With this option you can create separate individual companies for each of your business ventures as subsidiary companies and place them under one main holding company.
This option is used by businesses in different situations e.g., where companies are looking to be acquired or potentially spin off one of their businesses or where established companies are looking to start a new business (and the established company wants to bankroll the new venture).
If you were to opt for this option, please do note that this option has complex tax and legal implications.
We always recommend that our clients consult with their accountants on the best way to structure a holding company and subsidiaries. Alternatively, we may be able to refer you to one of our partner accountants for specialist accountancy advice.
Please note that any referrals that we make to other professional advisers are in your best interests and that we do not accept referral or introduction fees for any referrals or introductions that we make to our partners or other professional advisers.
It is essential to note that a DBA does not give the same personal liability protection that a limited liability company offers. As a DBA is not a separate legal entity as the owner of the business you are fully liable for all actions taken and decisions made under the DBA. You therefore must be sure that you choose the right legal structure to protect you from the risks and liabilities associated with your business operations.
The crucial thing to note is that there is no legal limit to the number of business ventures that you can start and run.
However, you must ensure that you are fully aware of the risks involved in each venture and that you take the necessary steps to mitigate your liability risks when structuring these ventures.
How can Pure Business Law help?
To discuss any of the matters raised in this piece please contact Pure Business Law. We are fixed fee specialist business and commercial solicitors based in Bedford and London. We operate nationally. If you would like to discuss starting a second business, require advice on the appropriate legal structure for your business or anything else raised in this article or on our website, please contact us and speak with one of our specialist expert business and commercial solicitors.
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