Client Services
My Partner & I Want to Set Up a New Business
Do we need a Company or can we use a Partnership?
Using a partnership is relatively straightforward and cheaper to set up than a company. Partnerships are often used by professionals, such as doctors, accountants and lawyers and in small, family businesses. However, one of the downsides with a partnership is that each partner is personally exposed to the business risks, including liability for all of the debts of the business. Where a business is operated by a husband and wife or family group, they can use a partnership, but this does mean that all the family members who are partners will be exposed to risk if there is a claim against the business. If you are thinking of using a partnership, then it is very important to have a written partnership agreement in place and we recommend putting this in place before you start the business.
Companies on the other hand are separate legal entities. This means that using a company to operate a business can help protect the individuals from direct liability should something go wrong. There are exceptions to this, such as claims against directors who allow the company to keep trading when it is insolvent, but generally companies offer a greater degree of protection.
Another advantage of using a company is that a group of people can get together to set up a business and each of them can have shares in their own name as well as in the names of other family members. There are tax issues you need to consider if you use a company, particularly relating to paying income out of the company, which is usually done by way of salaries and dividends and also capital gains tax issues which arise if you want to sell the business at a later time.
Companies do cost more to set up and to maintain and you need to be careful about keeping the business and assets of the company separate from your personal assets and finances.
If you decide to use a company structure, we recommend putting in place an effective shareholders’ agreement so that the rights and obligations of all of the shareholders are clear.