Business Structures
DISCLAIMER: These guides are for informational purposes only, and do not constitute professional legal advice. Please consult independent legal advice for information specific to your country and circumstances. Shopify is not liable to you in any way for your use or reliance on these guides.
Structures
Your Options
(i) Sole Trader
(ii) Partnership
(iii) Limited Company
Whether you're just starting out or deciding on the right structure for your existing company, understanding the law around business organization is important. You'll have to assess the nature of your business to figure out which option will afford you the most benefits.
Sole Trader
This is the most common structure for online store owners, and also the easiest to run and set up. To become a sole trader, register with HM Revenue & Customs as soon as possible after you begin to conduct business. You can be penalized if you fail to register before Oct 5th of your business’s second tax year.
With this structure, your business is not a separate entity from you. A sole trader does receive all profits, but is also personally liable for all debts or legal action taken against the business.
This common and simple structure is ideal for a shop with little risk of liability.
Legal Guide Notable Info
Pros
(i) Easy to set up and run.
(ii) Control of all business
decisions and profits.
Cons
(i) Not a separate business entity.
(ii) You are responsible for all debts or actions against the company.
Partnership
Legal Guide Notable Info
Agreements
Considerations
A well-drafted and balanced agreement should include:
(i) Names of partners and how new partners can be added.
(ii) An outline of the business.
(iii) Investment, liability and profit share of each partner.
(iv) Steps outlining what happens if partnership is dissolved.
A partnership is another common structure for small businesses. These are formed when two or more individuals are co-owners of a business venture. This structure allows individuals to pool their assets and skills to increase their chances of success.
Setting up a partnership is simple. You must choose a "nominated partner" who will register the partnership with HM Revenue & Customs. This will automatically register that person for self-assessment. The remaining partners will then have to do the same. Click here for the link that applies to you.
Like a sole trader, a partnership is not a separate legal entity from its owners. This means the partners are personally liable for all debts and obligations of the business. An additional consideration is that all partners are liable for the actions of the others in relation to the business. One partner may be responsible for the debt of another if their assets are insufficient to cover an obligation.
With this form of organization, remember to focus on the human element. There’s always a chance that a friendly partnership can change in the future. For this reason, make sure to have a lawyer assist you when drawing up a partnership agreement. Selecting the right partner is important because you’re liable for the debts and actions that they incur on behalf of the business.
Legal Guide Notable Info
Pros
(i) Allows for a division of labor.
(ii) Partner brings more capital investment.
Cons
(i) Not a separate entity.
(ii) Jointly liable.
(iii) Business relationship can sour.
Company
Running a company has many benefits and does increase your credibility as a business. The process is more complicated but has many potential benefits for your online shop.
To start operating as a Limited Company, you must inform HM Revenue & Customs as soon as the business begins its operations under this structure. Additionally, you must register the company with the Companies house. This process is also known as incorporating. A company is a separate entity from its owner, meaning it has its own liabilities, debts and profits. You are not personally financially liable for what happens to the company. This is a good business structure if your company is growing and has a greater potential for liabilities.
Legal Guide Notable Info
3 Steps to Incorporation
Company Name
Before you begin the process, you must choose a name.
The Companies Office cannot reserve this name. It will be assigned based on which application is processed first.
You can check the registry of names to ensure it does not yet exist.
There are some restrictions. When you are incorporating your business, the name must end with "LTD" or "Limited."
Required Elements
Company name and registered address — Name & address must comply with rules above.
One director — This individual is legally responsible for running the company.
Shareholders — Individuals with a stake in the company.
Memorandum of association — Statement made by the relevant parties saying they intend to form a limited company.
Articles of association — These are the agreed upon rules that the company has to follow.
There are somewhat complicated and detailed components to this business structure. It's a big decision to register and incorporate your business, and you should consult a lawyer prior to submitting an application.
Legal Guide Notable Info
Pros
(i) Separate entity.
(ii) Limits your financial liability.
(iii) The corporation survives the death of shareholders or sale.
(iv) Tax advantages.
(v) Improves your credibility.
Cons
(i) Heavily regulated.
(ii) Extensive record keeping.
(iii) More expensive then the others to form (fees associated with incorporation).
Choosing a business structure
It's important to consider the unique aspects of your business when deciding which organizational structure to choose. Although some options have benefits on paper, they may not be a worthwhile option for you. There are detailed and helpful resources available from the United Kingdom Government. Before finalizing your decision, consult a lawyer to make sure you've made a sound choice and that the process is completed properly.
Conclusion
Legal Guide Notable Info
Being aware of and obeying the rules that apply to you as an online business owner is an important aspect of running your shop.
Protecting your brand, your assets, and maintaining a positive customer relations are all affected by your ability to understand and obey the law.
The law is fluid and can always change! The resources provided to you in this book will allow you to stay up to date and make sure you are aware of requirements placed on you.