Structuring your business Peter Davy Thu 25 Apr 2002 02.37 BST Whether buying a franchise or running a limited company, you need to decide on a business structure for legal and accounting purposes. Peter Davy gives some pointers It's often said that all successful businesses start with a good idea. Whether you are self-employed or running a partnership or a limited company, unless you have a strong concept your business is likely to fail and you are likely to be left out of pocket. But those who can't wait for the flash of inspiration before escaping the nine to five shouldn't worry, because it doesn't necessarily have to be your idea. Under a franchise, you can buy a license to use the franchise's name, and often its business process, products, services, promotions and management system. Big-name franchise businesses include the likes of hairdressers Toni&Guy, McDonalds, confectioners Thorntons and the Body Shop. A franchise gives the fledgling business person the advantage of the goodwill associated with the franchise name, and, perhaps more importantly, the use of a proven method of business. For this reason, there is some evidence that franchises are less likely to fail than other business start-ups. The franchisor is also likely to provide some level of support in the way of training and marketing, making it less daunting than going it alone, though this will vary from firm to firm. Buyers need to do their research on potential franchises and should take legal advice before signing any agreement. Above all, they need to make sure they know what they're getting for their money, because while a franchise might be the least risky way to set up a business, it's certainly not the cheapest. Franchises start at a few hundred pounds and run to thousands. As well as the initial license fee and its renewal, there are likely to be ongoing fees taking a percentage of your turnover or put onto the price of the goods or services you sell. Some franchises might also charge towards the costs of their advertising. Despite the high success rate, when some set out to be their own boss, that's exactly what they mean, and the loss of control a franchise involves can be too high a price to pay. Whether buying a franchise or not, you need to decide on a business structure for legal and accounting purposes before starting up in business. Going solo or diving in together? By far the most popular choice is to set up as a sole trader. It's relatively easy; you just need to register as self-employed with the Inland Revenue and display your name, trading name and address on all business premises and stationary. Other than that, the administrative burden is light. Profits are treated as personal income and you can even use your personal bank account to run the business, though business transactions need to be clearly identifiable. While the burden of paper work may be pretty light for the selfemployed, the financial liabilities are unlimited. The law makes no distinction between the business and its owner, so if it fails, your personal assets are at risk, which in itself is enough to put many people off. This goes doubly for partnerships, which are for when two or more people want to go into business together. Setting one up is almost as easy as starting alone. Partners are considered self-employed and, in the absence of any other agreement, will share the profits equally. Partners are also personally liable for the debts of the business - jointly and severally liable, so if one partner can't pay his share of the debt, the others will have to. It's also worth remembering that it is a partnership, not a democracy, and each partner can make binding business decisions and contracts without the others' consent. For these reasons, Sally Agass, of Hackney's enterprise agency, HBV enterprise, is adamant that partnerships should be on a legal footing: "If people are keen on a partnership, then our advice is always to draw up a partnership agreement that has had legal checking." The Limited Liability Company, and more recently the Limited Liability Partnership, were designed for those people who wanted to go into business for themselves but did not want to put their house on the line doing so. The mainstay of both is that they are separate legal entities to their owners, so creditors can only claim against the business's assets, not the personal assets of the owners. Much of the benefit of this is likely to be eroded by the banks, which often ask for personal guarantees from borrowers looking to finance their start up. However, some advantages remain, even where this is so. Apart from anything else, other creditors are not likely to be able to ask for personal guarantees. Both business structures can also survive the death of one or more of the owners, unlike sole traders and normal partnerships, which are normally dissolved, and change of ownership is generally easier to achieve. Against this are the increased costs of setting these structures up - to set up and register a limited company at Companies House often costs about £500 through a solicitor - and a far greater administrative burden, including the requirement to register audited company accounts. However, starting up in business you will be prepared for a lot of hard work, and the decision as to which legal structure to adopt is more likely to be made on financial grounds. The conclusive factor is often the tax you'll end up paying, and for very small businesses, staying unincorporated, at least initially, often works out cheaper. Of course, tax isn't the first thing you want to think of when dreaming about starting your own business, but it needs to be one of them. Because in an environment where money is tight and so many business start-ups fail in the first five years, the bean counter is king.
