In order to effectively convey your business idea to others it is essential to define clearly the basic structure of your business. Your business idea forms the nucleus of your business plan and is the starting point from which every other aspect will emanate. A clear definition of your intentions is essential for investors to make informed decisions regarding your proposal.This chapter will cover the processes involved in setting up your business. All the sections are equally important and will form the introductory part of your business plan. From this information the reader must be able to gain a clear and concise understanding of your business idea.

Planning Your Legal Entity

Once you have decided which type of business you would like to run the next task is to choose the legal entity you will trade under. There are three main types, each with its own set of advantages and disadvantages. We will look at each in more detail to help you decide which best suits your needs:

• sole trader
• partnership
• limited company.

Becoming A Sole Trader

As the name suggests this is usually a one person business where one individual has been solely responsible for starting it up and raising all the necessary capital. There is very little red tape with this type of business and there are no particular legal formalities to adhere to. However, you should contact the Inland Revenue and Social Security authorities to inform them you will be working for yourself and when you intend to start trading. They will be able to give you further advice and can be contacted through your local phone book or:

Going Into Partnership

A partnership is similar to a sole trader in that it is simple to establish. Each partner has unlimited liability for all debts of the partnership. There may be anything from between two and 20 members, each with the same objective – to make a profit. For this reason a charity cannot become a partnership.

As with a sole trader, a partnership does not have to be registered and it is not compulsory to have any form of partnership agreement. However it is strongly advisable to have such an agreement drawn up by a solicitor at the outset of your business, even if your business partner is your wife, husband or best friend. That way, if there is ever any dispute, both parties will have a document to refer to. It would cover such things as:

You may wish to include a sleeping partner in the business. A sleeping partner would provide capital but have no say in the day to day running of the business. The sleeping partner may choose to become a limited partner which means they would only be liable for their initial investment and nothing else. At least one member of a partnership must be a general partner with unlimited liability for all the debts of the partnership. A partnership, like a sole trader, is not legally bound to publish its accounts.

Forming A Limited Company

Limited companies are the most complex type of business to set up. Once formed, a limited company is a legal entity quite separate from its owner(s). The individuals who own it are only financially responsible for paying for the shares they are issued with. A limited company has to pay corporation tax on its profits, and PAYE plus national insurance contributions on behalf of its employees. If you are a director you will be treated as an employee and have Class 1 national insurance and income tax deducted from your salary.

There are two types of limited company, private and public, each carrying advantages and disadvantages.

Further information about limited companies can be obtained by contacting your professional adviser.