Setting up an electrical business.
So you want to set up an electrical business.
Deciding on your business structure is an important first step.
This advice is for information and entertainment purposes only, and I would recommend you
consult an accountant, for advice, before setting up a business.
So what do we mean by business structure?
I’m Craig Miles, and have a master’s level teaching qualification, in business and economics.
I’ve also worked in, and set up a number of businesses, over the last 20+ years.
What we mean by business structure is the legal structure, you trade under.
This advice is focussed on the system within the UK, but similar business structures exist,
throughout the world.
There are pro’s and cons of each type of business structure.
So lets look at the business structures available.
The Sole Trader Business Structure
Setting up as a Sole Trader is the quickest and simplest way you can set up a business in the
the UK.
To set up as a Sole Trader business, in theory, all you need to do, is inform the HMRC.
The HMRC is the UK tax authority, and is short for ‘His Majesty’s Revenue & Customs’.
The HMRC are the people you will submit your annual tax return to, and pay any tax owed.
There are however disadvantages (in addition to the advantages) to being a Sole Trader
though.
The big one is personal liability.
You as a business owner, are responsible for the financial debt of the business.
For example, if you have a bad customer who doesn’t pay for work done, and owes you
£10,000, and you owe the wholesaler £2000 for job materials, you have a serious problem.
It’s a serious problem if you don’t have the £2000, to pay the wholesaler, who supplied you with
the cable and other electrical parts, that you used to do the job.
The wholesaler could start proceedings against your business, to recover the money owed to
them.
As a Sole Trader, you are directly liable for the debt, even though it was incurred by your
business.
So if you couldn’t pay through the business bank account funds, it would make no difference,
you would have to pay from other money or assets you personally own.
If you have no money in your personal bank account, then the company owed the money could
apply to the courts, for permission to send in bailiffs.
The bailiffs would come and take personal possessions away, to sell them, to recover the
money owed.
So for example, your family TV, or car, could be taken, if in the name of the person running the
Sole Trader business.
Theoretically, they could take everything you own, including your house.
So how can I protect my personal possessions from creditors (people you owe money to).
The Limited Company Structure
A Limited Company is a separate legal entity.
What we mean by a legal entity, is liability for debts is separate, from the founder of the business.
In a limited company, the business is controlled by one or more directors.
The directors control a percentage of the business, which is written down formally when the
company is legally set up.
So for example, if you had two directors, they might have a 50% each, but it could be 70 : 30, or
whatever is decided.
The directors control and run the business as if the business is a separate person, that they
are managing.
The advantage of the limited company being a separate legal entity is that if it owes money, you
don’t!
Limited companies are also known as Limited Liability Companies, as the liability is limited to
the total value of the share capital.
So for example, if the total share capital on the company formation documents, is a total of
£100, then £100 is the maximum that all the directors of the business, are liable for personally.
If the company can’t afford to pay its debtors, then its directors won’t lose personal assets.
So going back to the wholesaler scenario that we used in the Sole Trader example. If the
wholesaler sued your business for non-payment of debts, then through a Limited company
structure, you wouldn’t potentially lose all your assets.
So why you may be thinking, aren’t all businesses structured as Limited companies?
Well it’s more complex and expensive to set up a Limited Liability Company, than a Sole Trader
business.
There are also tax advantages and disadvantages for both structures, hence my advice, to
speak with an accountant.
Other Business Structures
There are other business structures, in addition to Sole Trader, and Limited Liability (Limited /
Ltd) available.
These include ‘Limited Liability Partnerships’ and ‘Cooperative’ structures.
I hope this short blog post on Setting up an electrical business, has been interesting and useful.