We are often asked by start ups and sole traders about incorporation and the best way to structure a business. The answer is not simple and there are several things to think about.
We have outlined the three main ways to structure a business and tried to explain the key differences as well as the advantages and disadvantages.
- Sole trader;
- Partnership; or
- Limited company.
- You are the sole owner of the business.
- You are personally liable for all business debts.
- There are no statutory requirements governing the format of accounting records.
- There is no need to have annual accounts audited (although you are required to submit accounts and tax computations to the tax authorities).
- You own the business jointly with one or more people.
- You are jointly and severally liable for all the firm’s business debts.
- You are not obliged to publish your accounts or have them audited.
- You are treated as a sole trader for tax purposes on your share of the partnership profits.
- The liability of the owners (shareholders) is limited, and your personal assets can be protected from those of your business. The directors are only liable for the debts of a company if they continue to trade and incur liabilities after it becomes apparent the limited company is insolvent.
- A company has to be incorporated by a corporate services provider and is also required to file an Annual Validation in January each year with the Guernsey Registry.
- Certain documents (e.g. Memorandum of Association/Articles of Association) have to be filed before you can begin to trade.
- You must prepare accounts each year. If you don’t pass an audit waiver resolution accounts need to be audited. Most small unregulated businesses in Guernsey are able to pass an audit waiver resolution.
Advantages and Disadvantages
Sole Trader / Partnership
- Easy to start up.
- Few legal formalities.
- Simpler accounts and lower accountancy costs.
- No requirement to have an auditor.
- Unlimited liability – personal assets could be affected.
- Profits taxed at personal rates.
- Less clarity around tax payable.
- Limited liability.
- Continuing existence – a company continues to exist until it is struck off the Guernsey Registry. It means a business can continue even when ownership transfers or the owner dies.
- Uniqueness of name – once you register a name with the Guernsey Registry, no one else can register the same name.
- Ideal vehicle for expansion – raising of finance can be easier.
- Credibility – clients and customers can perceive a more professional approach from a business run from a limited company knowing that they are complying with the Company Law.
- Only taxed on profits as they are taken out of the Company. Profits within the company taxed at 0% (for most companies).
- Much disclosure of information – e.g. re annual accounts, Memorandum and Articles of Association.
- Tightly regulated by the Company Law.
- Higher set up costs and annual running costs.
- Less flexible profit sharing arrangements.