Many people dream of owning their own business, and being in control of their own destiny.
However “being your own boss” is a significant step that comes with many decisions, responsibilities and risks. For some, the dream can become a nightmare so it is important to make some key decisions before you start out.
For people who go into business for themselves – whether by buying an existing business or starting one from scratch – one of the first decisions they need to consider is whether to operate the business as an individual, in a partnership or through a company.
The legal consequence of buying or starting a business is that generally you are responsible for that business. You gain any profits the business makes but you are also responsible for any losses.
One way to try to limit your liability for any losses is to establish a company to buy or start your business.
At law a company is seen as a separate legal entity, which means that the business is run in the company’s name. The main advantage of having a company is the fact that the company’s assets are normally at risk, rather than the individual’s.
One of the main drawbacks of forming a company is the added complexity it brings to the business. There are quite a few matters to attend in setting up a company, and it can be quite complicated to run. Companies generally require the assistance of an accountant in both the setting up and running to ensure they comply with all the relevant legislative and legal requirements.
An attractive alternative – especially with small businesses – is to simply run it in your own name (although you can still trade under a business name).
Many people running small businesses choose this approach, as it keeps things simple. The risk in running a business this way is that the individual business owner is responsible for any losses, and any assets they own can be attacked by anyone for any losses in the business.
In extreme cases, this can result in people “losing their home” when their business fails and creditors make claims against them – although this can also happen when people put up their home as surety for bank loans for their business.
So it is important to understand the potential risks involved in your business.
Many people enter into partnerships to form a business, whether with friends, workmates or family members. An important rule of thumb is to choose your partners very carefully, because business and financial pressures can strain even the closest relationships.
When forming a partnership, you and your partner(s) are equally responsible for any losses, subject to any partnership agreement. You are also responsible for your partner, which means that if they do something wrong, then your assets can once again be attacked.
When starting a business, it is important to obtain advice from an accountant to work out what model bests suits your circumstances.