As accountants specialising in several retail sectors (forecourt, convenience, hospitality and even opticians’ practices) we’re involved in a great many new business start-ups. In recent years, a large proportion of these new businesses have come under the generic heading of franchises, and it’s quite routine for franchise-type businesses to be operated through limited companies. Naturally, many people taking such franchises have already been running small businesses of their own for some time usually as sole traders. But we find that there’s a considerable amount of confusion, and many misapprehensions, concerning the practical differences between working as a sole trader (or in partnership), and suddenly being a ’director’ of their own company. So if you’re in the position of considering a ’franchise’-type operation, or are about to start trading in a limited company set up, here are some of the basic distinctions to be aware of:
A limited company is a legal ’person’ distinct from its owners (shareholders) and managers (directors). When you form a limited company you register it at Companies House and receive what amounts to a ’birth certificate’ for that new legal person a Certificate of Incorporation.
The company is owned by its shareholders. The extent to which any individual ’owns’ a part of that business depends on the proportion of shares in the company that he/she owns. Imagine that you form a company with £100-worth of initial share capital, divided into 100 shares of £1 each. If you paid the entire £100 into the business and issued all of the shares to yourself, you are the ’owner’ of that company. If, however, you only bought 75 of those shares and issued the other 25 to your husband or wife, then they own a quarter of ’your’ business.
That may not make much difference to the running of your business day-to-day, but it will matter at some point. For example, if you wish to pay yourself through dividends (potentially a way of reducing your personal income tax) or when you come to sell the business. In many ’franchise’ operations, the person or company ’offering’ the franchise may have particular rules regarding the ownership of your business. For example, you may be required to personally own at least 75% or even 100% of the shares in the new (franchisee) company. Shareholders don’t become employees of the company just by owning shares in it and, in many cases, a shareholder has no other connection with the company at all.
The directors manage the company. A director doesn’t have to own any shares in the company, likewise being a shareholder doesn’t automatically make someone a director. The two positions are quite separate: shareholders appoint (and can remove) directors, and directors are responsible to the shareholders for running the company in a sound and legal manner. The appointment of directors is legally recorded their names and home addresses are available for anyone to look up. Directors are usually employees of the company, but don’t have to be. If they are employed, it doesn’t have to be on a full-time basis, and they can perform a similar role in more than one company.
Every company has to have a Registered Office (it’s called that because you register the address at Companies House). This is an address to which all legal or formal correspondence will be sent, and it will appear on all of your business documents right down to invoices and customer till receipts. It’s chosen by the shareholders and/or directors. It does NOT have to be the address from which your business operates day-to-day. Indeed in some operations (such as oil-company owned forecourts), the property owners may insist that you can’t use the address of their property as your registered office. You could use your home address, but many people don’t like that idea because it puts your home address out there for all to see. An alternative offered by many accountants and solicitors is to use their premises as your ’registered office’.
Anyone in business, sole trader or otherwise, should operate a business bank account separate from any individual’s personal bank accounts. For limited companies, this isn’t just ’good practice’ but essential. Your company has to have its own bank account in the company’s name. The choice of which bank to use will largely depend on whether you need to borrow money to start the business. If you go to a bank looking for funding of any sort then usually they’ll insist that one of the conditions for borrowing is that they’ll provide your company’s current account. It can take several weeks to get a business account up and running, but it’s one of the critical steps you have to take before you can start trading, and you won’t be able to take the next one until the company bank account is sorted.
Because the company is a legal ’person’ in its own right, it must be registered with HMRC for both VAT and employment taxes. We frequently find that owners of new companies believe that the registration they had as sole traders (eg VAT registration for their earlier forecourt business) is somehow applicable to their new company, especially when they’re trading in the same sort of business, or even at the same location, as previously. The basic answer is that you have to register the new company before the date that it starts trading, and the company will receive a new VAT Certificate of Registration, usually a new VAT number, etc.
Next month we’ll cover some of the most common practical areas where new company operators get confused with their old sole-trader ways.