1. Limited Liability Limited Liability

2. Choosing the best legal structure There are several choices of business structure for a start-up Setting up a new business is a simple, straight-forward task The trick is to choose a legal structure to minimise the risk of investment which is also appropriate for the business The most important issue is whether the entrepreneur is personally liable for the debts of a start-up

3. Importance of limited liability An important protection for shareholders in a company Shareholders can only lose the value of their investment However limited liability does not protect against: – Wrongful or fraudulent trading, or – When personal guarantees have been given by directors

4. Sole trader The most common type of business structure Very simple and cheap to set up A sole trader is just an individual owning the business on his/her own Remember that a sole trader can also employ people – but those employees don’t share in the ownership of the business The sole trader owns all the business assets personally and is personally responsible for the business debts. A sole trader has unlimited liability Unlimited liability not too much of an issue if the sole trader just deals in cash!

5. Sole trader + / - AdvantagesDisadvantages Quick & easy to set up – the business can always be transferred to a limited company once launched Simple to run – owner has complete control over decision- making Minimal paperwork Easy to close / shut down Full personal liability – “unlimited liability” Harder to raise finance – sole traders often have limited funds of their own and security against which to raise loans The business is the owner – the business suffers if the owner becomes ill, loses interest etc Pay more tax than a company

6. Limited company (1) Limited companies are separate legal entities to the founders. A legal entity can own things itself (assets), can sue and be sued Companies are owned by their shareholders and run by directors. The shareholders appoint the directors (who in most cases are one and the same people!) who run the company in the interests of the shareholders Shareholders own a share of the company, but they do not own the assets of the company and they are not liable for the debts of the company

7. Limited company (2) The company owns the assets and pays the debts. If the company becomes insolvent (i.e. it cannot pay its debts), then the company is closed Shareholders are not liable for any debts owed by the company that cannot be settled. That is the importance of limited liability By far the most common form of limited company is a private limited company. Private means that the shares of the company are not traded publicly on a stock exchange By contrast, a public limited company (“plc” after its name) tends to have a larger value of share capital invested and its shares may be traded publicly. It is rare for a start-up to be a plc

8. Limited Company + / - AdvantagesDisadvantages Limited liability – protects the shareholders (the big advantage) Easier to raise finance – both through the sale of shares and also easier to raise debt Stable form of structure – business continues to exist even when shareholders change Can pay less tax Greater admin costs Public disclosure of company information Directors’ legal duties

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