Edmon Lawyer Partners

The power of the lawyer is in the uncertainty of the law

How To Setting Up A Limited Company

Many people wonder why should they start a private limited company, as such a venture would often involve additional expenses and administrative work. In the case of a sole proprietorship business, these expenses are very nominal.

The deciding factor for forming such a company is your financial liability as an individual. In case you were the sole proprietor and the business flops for whatever reason, you alone are liable to clearing all your debts. When you have large debts that you are unable to pay, you are exposed to the risk of personal bankruptcy. The formation of a limited company provides protection against such an eventuality.

The advantages

By itself, a limited company being an entity is accountable for the actions it takes. The funds of such a company are totally detached from those of the people owning it. There can be one or additional shareholders in private limited companies, though the owners can’t sell the shares to the public, or trade them through the stock market. Only public limited companies can do that.

As long as you do not trade in a false or reckless manner, your risk of losing money as the director of the limited company is only to the extent of the money you may have invested in that company. Nonetheless, if you availed loans from banks against personal guarantee, you will be held liable for paying those loans.

Having such a company may, to some extent, enhance your credibility to prospective clients.

How to start one?

You may hire the services of an agent, advocate or accountant who would do it for you and charge a little fee. You’ll need to give some primary information for doing the needful, and sign a couple of papers. Else, you may visit the Companies House online and incorporate your company.

You can also buy a ready to use name for a limited company. However, when you wish to setup an absolutely fresh one, it is obligatory for you to submit the articles of association, the memorandum of articles, along with a fulfilled IN01 form to the Companies House.

A memorandum of association contains the details pertaining to the name of the company, the nature of its business, and the address of its registered office. All the directors need to sign it in the presence of at least one witness. The Companies House sends all its letters, notices, and reminders to the registered office of the company. The articles of association spell out the rules and regulations for running the company.

Responsibilities of the directors of the company

A private limited company should essentially have one director, who may also hold some shares of the company. People charged with bankruptcy and those below sixteen years of age can’t be appointed as directors.

It’s no more obligatory for these companies to employ a company secretary, as the directors of a private limited company are accountable for keeping the Companies House informed of any amendments in the management or structure of their company.

 

Understanding The Difference About LLC and an LP

Decades ago, business owners had few options aside from sole proprietorships, partnerships, and corporations. Today, limited partnerships (LPs) and limited liability companies (LLCs) are two of the most popular entities for small businesses. These entities have many of the same advantages, including flexibility, pass through taxation, limited liability protection, and greater control of management compared to a corporation. Both are also treated like a general partnership by the IRS for tax purposes. For these reasons, it’s easy to confuse the two. Here’s what you should know about the difference between an LP and an LLC.

Limited Liability Companies

A limited liability company, or LLC, is actually a hybrid business entity that combines the best features of a sole proprietorship, partnership, and corporation. Every owner, or member, enjoys limited liability protection similar to that of a corporation shareholder although an LLC is far more flexible. Unlike a corporation, an LLC does not have strict formalities like the requirement to produce annual reports or hold director meetings.

An LLC is a pass-through tax entity. This means each member’s share of business losses and profits are reported on the member’s personal income tax return. An important distinction with forming an LLC is members can choose to distribute profits any way they like without considering each member’s contribution to the company.

Limited Partnerships

Limited partnerships have at least one limited partner and at least one general partner. The general partner is the one who participates in management with 100% liability for any obligations of the business while limited partners cannot participate in the business management but have no liability for the company’s obligations beyond their financial contribution to the business.

The benefit of an LP is it’s an attractive entity for passive investors. Because limited partners have such strong protection, general partners can more easily raise money without worrying about outside investors becoming involved in the business’ management.

Which is the Right Choice?

There are advantages with each option. Both LLC owners and limited partners of an LP enjoy limited liability protection, but limited partners will lose this protection if they choose to actively participate in business management. This makes a limited liability company a more flexible business structure in terms of management.

While both are treated as a pass-through tax entity, the LLC does come out ahead in this area because LLC members can claim tax losses in excess of their capital investment in the business, unlike limited partners.

There are a few advantages to an LP. Not all states have the same tax treatment of limited liability companies as some states limit the types of businesses that can form an LLC while others tax LLCs like corporations. Limited partnerships can also come with additional tax deductions for employees.

Both business entities offer many of the same benefits that are important to any small business, including flexibility and limited liability protection. Despite their similarities, there are distinct differences between the two, however, which means it’s important to consult with an expert such as a corporate services company or an attorney before you make a choice.

 

All About Legal Structure

At this point you have decided to start a cleaning service, but you don’t know what your business structure should be – a sole proprietor, partnership, LLC, or Corporation. The information is confusing, there is paperwork to be filed, and it costs a lot of money to get advise. Well, not really, I am here for you.

Most cleaning services start out as sole proprietorship. For some this works, but I strongly caution against this. Before I explain why, you need to know the differences between different structures.

Sole proprietorship is the simplest form of business that directly ties the owner to the same without providing any protection to his/her assets by being a different entity. Basically, the owner is solely responsible for all debt, benefits from all income, and the business is he or she for any legal purposes.

A corporation is an entity for itself and the owner becomes a shareholder of the same. In essence, this means that the corporation itself is liable without the owner being subject to any liability through his personal assets. The actions and debts of the business are all on the business and therefore do not affect owners private assets. Special taxation rules apply as well as both entities including the owner and the corporations have to pay separate taxes.

A Limited Liability Company (LLC) is a mix between the two. This legal structure is maintained by the states and not the federal government, so all income flows through to the owners, however, any liability is limited to the company only and owners personal assets and owners as an entity are protected.

For a cleaning service, I strongly recommend the LLC structure. You will work in expensive homes, offices with confidential information, and businesses with proprietary technologies and processes. If something happens due to your mistake or the mistake of your employees, you want to make sure your personal assets are protected and off-limits in case of a law suit.

Formation of an LLC can appear to be a daunting task, but services such as LegalZoom and others offer to complete the entire process for you for as little as $150. I would highly recommend using such a service as they do a great job at an affordable price and ensure that all is right. Please be aware that before you can form an LLC, you need to obtain a FEIN number from the IRS. Many websites will try to charge you upwards of $50 for this, but you can easily obtain this number online from the IRS online system in less than five minutes. As an alternative many states offer a free formation service online or free forms for you to complete yourself.

Once this step is completed, you will have the necessary paperwork to complete many other tasks such as opening a business checking account.

 

The Difference About Business Legal Structures

There are several common legal structures that you can set your business up under. Which one you chose is going to depend on what kind of business you are setting up, who else is involved in this plan with you, your own personal preferences, among several other factors.

Here is a quick overview of your options.

Sole Proprietorship

This is still the most common type of business structure, particularly for small businesses that are just starting out. This means that one person owns and is responsible for the business. They make all the decisions, but they also hold all the financial responsibility. The profits or losses from the business are reported on the proprietor’s personal taxes.

General Partnership

This is very similar to a sole proprietorship, except that there is more than one person involved in owning and operating the business. The business is still connected to you, but also to your partners. This means you all share in the management and financial responsibilities of the business.

Corporation (LTD or INC)

A corporation is an entity that is formed and does business on its own, separate from anyone personally. This means that the financial situation of the business does not roll over onto the person who owns the business.

While this may seem like the better option to avoid personal liability if something happens within the business, it can be extremely tedious and expensive to set up and maintain. This is not a viable option for most small business owners because most of them cannot afford the set up fees or maintenance of records required.

Limited Liability Company/Corporation (LLC)

This is a newer and very popular type of business structure because it offers the benefits of a corporation, does not require a lot of the same hassle. Unlike a limited liability partnership, you can set up this type of company with only one person. It provides a lot of the financial protection of a corporation, but does not require as extensive measures to upkeep.

Limited Liability Partnership (LLP)

This is a different type of partnership, but it also provides some of the financial protection of a corporation. Unlike an LLC, you must have at least two partners. However, it is easier to maintain and keep your structure than an LLC. This business structure is also much more common in the UK, which LLCs are more popular in the US.

How you set up your business is an important decision. The structure you choose could make a big financial and legal difference. It will depend on many factors, including local laws. Take the time to research your options and talk to an accountant or other business professional and anyone else involved in your business before making your decision.