10 Ways to Finance Your

Business
Financing a business is always a challenge. Here we've
compiled 10 techniques, from the tried-and-true to the
experimental.

BY INC. STAFF

15 COMMENTS

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Finding financing in any economic climate can be challenging, whether

you're looking for start-up funds, capital to expand or money to hold on
through the tough times. But given our current state of affairs, securing
funds is as tough as ever. To help you find the money you need, we've
compiled a guide on 10 financing techniques and what you should know
when pursuing them.
1. Get a Bank Loan
Lending standards have gotten much stricter, but banks such as J.P.
Morgan Chase and Bank of America have earmarked additional funds for
small business lending. So why not apply?
Read more on what you need to know about filling out a loan application.
2. Use a Credit Card

Using a credit card to fund your business is some serious risky business.
Fall behind on your payment and your credit score gets whacked. Pay just
the minimum each month and you could create a hole you'll never get out
of. However, used responsibly, a credit card can get you out of the
occasional jam and even extend your accounts payable period to shore up
your cash flow.
Read more on financing your business with a credit card.
3. Tap into Your 401(k)
If you're unemployed and thinking about starting your own business, those
funds you've accumulated in your 401(k) over the years can look pretty
tempting. And thanks to provisions in the tax code, you actually can tap into
them without penalty if you follow the right steps. The steps are simple
enough, but legally complex, so you'll need someone with experience
setting up a C corporation and the appropriate retirement plan to roll your
retirement assets into. Remember that you're investing your retirement
funds, which means if things don't pan out, not only do you lose your
business, but your nest egg, too.
Read more on financing a business with your 401(k).
4. Try Crowdfunding
A crowdfunding site like Kickstarter.com can be a fun and effective way to
raise money for a relatively low cost, creative project. You'll set a goal for
how money you'd like to raise over a period of time, say, $1,500 over 40
days. Your friends, family, and strangers then use the site to pledge
money. Kickstarter has funded roughly 1,000 projects, from rock albums to
documentary films since its launch last year. But keep in mind, this isn't
about long-term funding. Rather, it's supposed to facilitate the asking for
and giving of support for single, one-off ideas. Usually, project-creators
offer incentives for pledging, such as if you give a writer $15, you'll get a
book in return. There's no long-term return on investment for supporters
and not even the ability to write off donations for tax purposes. Still, that
hasn't stopped close to 100,000 people from pledging to Kickstarter
projects.
Read more on using Kickstarter for business.
5. Pledge Some of Your Future Earnings
Young, ambitious and willing to make a bet on your future earnings?
Consider how Kjerstin Erickson, Saul Garlick and Jon Gosier are trying to
raise money. Through an online marketplace called the Thrust Fund, the

three have offered up a percentage of their future lifetime earnings in

exchange for upfront, undesignated venture funding. Erickson is willing to
swap 6 percent of her future lifetime earnings for $600,000. The other two
entrepreneurs are each offering 3 percent of future earnings for $300,000.
Beware: the legality and enforceability of these "personal investment
contracts" have yet to be established.
Read more on trading future earnings for funding now.
6. Attract an Angel Investor
When pitching an angel investor, all the old rules still apply: be succinct,
avoid jargon, have an exit strategy. But the economic turmoil of the last few
years has made a complicated game even trickier. Here are some tips to
win over angel interest:

Add experience: Seeing some gray hair on your management team will help ease
investors' fears about your company's ability to deal with a tough economy. Even
an unpaid, but highly experienced adviser could add to your credibility.

Don't be a fad-follower: Did you start your company because you are truly
passionate about your idea or because you want to cash in on the latest trend?
Angels can spot the difference and won't give much attention to those whose
companies are essentially get-rich-quick schemes.

Know your stuff: You'll need market assessments, competitive analysis and solid
marketing and sales plans if you expect to get anywhere with an angel. Even young
companies need to demonstrate an expert knowledge of the market they are about
to enter as well as the discipline to follow through with their game plan.

Keep in touch: An angel may not be interested in your business right away,
especially if you don't have a track record as a successful entrepreneur. To combat
that, you should formulate a way to keep them in the loop on big developments,
like a major sale.
Read more on finding an angel investor.
7. Secure an SBA Loan
With banks reluctant to take any chances with their own money in the wake
of the credit crisis, loans guaranteed by the U.S. Small Business
Administration have become a hot commodity. Indeed, funds to support
special breaks on fees and guarantees on SBA-backed loans have run out
a number of times. And while SBA-backed loans are open to any small
business, there are a number of qualifications, including:

Under law, the SBA can't guarantee loans to businesses that can obtain the money
they need on their own. So you have to apply for a loan on your own from a bank
or other financial institution and be turned down.

In order to qualify as a small business, your firm needs to meet the government's
definition of a small business for your industry.

Your business may need to meet other criteria depending on the type of loan.

After determining that your business meets the qualifications, you need to apply
for a commercial loan from a financial company that processes SBA loans since
the SBA doesn't provide loans directly. The bank's qualifications can be more
stringent.
Read more on getting an SBA loan.
8. Raise Money from Your Family and Friends
Hitting up family and friends is the most common way to finance a start-up.
But when you turn loved ones into creditors, you're risking their financial
future and jeopardizing important personal relationships. A classic mistake
is approaching friends and family before a formal business plan is even in
place. To avoid it, you should supply formal financial projections, as well as
an evidence-based assessment of when your loved ones will see their
money again. This should reduce the likelihood of unpleasant surprises. It
also lets your investors know you take their money seriously. You also
need to seriously consider how the arrangement will be structured. Are you
offering equity? Or will this be a loan? Perhaps most importantly, you need
to emphasize the risk involved. Offer up a strong business plan, but remind
them there is a good chance their money will be lost. It's better to mention
that upfront to Aunt Gladys rather than over Thanksgiving dinner.
Read more on raising money from family and friends.
9. Get a Microloan
The lack of a credit history, collateral or the inability to secure a loan
through a bank doesn't mean no one will lend to you. One option would be
to apply for a microloan, a small business loan ranging from $500 to
$35,000. Microloans are often so small that commercial banks can't be
bothered lending the funds. Instead of a bank, you need to turn to a
microlender. a non-profit organization that works differently than banks.
Microlenders offer smaller loan sizes, usually require less documentation
than banks, and often apply more flexible underwriting criteria. There are a
few hundred microlenders throughout the U.S. and they often charge

slightly higher interest rates for loans than banks. "Microloans are really for
that startup entrepreneur or an entrepreneur in an existing business facing
a capital gap who needs to secure capital for new equipment or to service a
contract," says Connie Evans, president and CEO of AEO, which represents
400 mostly non-profit microlenders and microenterprise organizations.
Read more on getting a microloan.
10. Consider Factoring
Factoring is a finance method where a company sells its receivables at a
discount to get cash up-front. It's often used by companies with poor credit
or by businesses such as apparel manufacturers, which have to fill orders
long before they get paid. However, it's an expensive way to raise funds.
Companies selling receivables generally pay a fee that's a percentage of
the total amount. If you pay a 2 percent fee to get funds 30 days in
advance, it's equivalent to an annual interest rate of about 24 percent. For
that reason, the business has gotten a bad reputation over the years. That
said, the economic downturn has forced companies to look to alternative
financing methods and companies like The Receivables Exchange are
trying to make factoring more competitive. The exchange allows companies
to offer their receivables to dozens of factoring companies at once, along
with hedge funds, banks, and other finance companies. These lenders will
bid on the invoices, which can be sold in a bundle or one at a time.

Alternative business funding:

Choosing a lender
15 Jan 2016 | Guide | Alternative business finance
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Online lenders have earned a solid reputation, with

major operators surpassing 1 billion in funds lent

As the major online lenders surpass 1 billion in funds provided, we

compare business funding options, assessing the key differentiators
and similarities.
The alternative business funding market for businesses is thriving right now. Ever since Zopa was
introduced more nine years ago, the market has developed tremendously and thus, more and more small
businesses are aware of their various funding options.
Up to date, Funding Circle has lent more than 1.5 billion to businesses, and Zopa has lent roughly the
same amount for both businesses and individuals. The entire concept, that was once considered disruptive
but dangerous, is now widely adopted by both private and corporate investors, as well as businesses of all
sizes; sole traders, family-owned SMEs, and even medium-cap corporates.
Even the European Investment Fund (EIF) is investing through EZBob, as well as the British Business
Bank, which is fully owned by the UK government, that invests through Funding Circle.

Lender similarities
At the end of the day, all alternative business funding sites have the same strengths and weaknesses. P2P
or B2B, the concept is quite samey. What these companies do best is credit assessments. They claim to
have developed sophisticated algorithmic models, which goes beyond normal credit scores. This credit
assessment allows the alternative funding companies to apply to a broader audience than banks, and
perhaps take risks that traditional banks are unwilling to take.
SEE ALSO: Choosing your business identity
The fact these lenders are powered by disruptive technology, and machine learning algorithms, also allows
them to operate much quicker than banks. All alternative business lenders in the UK like Funding Circle,
Zopa and RateSetter guarantee it wont take more than a week to process the application and grant (or
disapprove) the loan, while cash advance firm Liberis promise it will take less than 24 hours to process the
application.
For investors, the benefits are obvious. When interest rates are kept at the level of all times low, a 5-7 per
cent annual ROI becomes a good enough reason to give alternative investment a try. In particular with
some lenders like Funding Circle which are transparent about their defaultingstatistics (less than 2 per cent
currently defaulted up to date).

Differentiators?
The first thing most business owners would look for, when they compare business loan companies, is the
APR each one offers. At the end of the day, any business owner is looking to pay as little as possible in
interest.
Alas, this is not a feasible task, considering the nature of the alternative funding industry. For starters,
offers are individualised; each business gets its own risk assessment, and thus, is eligible for different
terms. Secondly, very few companies are as transparent as Funding Circle. As most companies arent keen
on revealing their entire pricing model divided to risk levels and expected APR (besides Funding Circle),
Its difficult to figure out the exact loan terms without actually applying.
Thus, a price comparison between different loan providers is virtually impossible. The only feasible way to
compare the market is to complete the loan quote application with multiple providers. The good news is
the application is a simple and smooth process with most lenders, and should not require a great deal of
time to complete.
Here are some tips to help you speed up and optimise the comparison process:

Each lender would state its minimum requirements on its website. It would be a waste of time to apply for
a loan when the lender clearly states a certain type or size of business would not be welcome.

For example, Fleximize advertises that it looks for business with trading history of at least six months, with
annual revenue of at least 3,000, and profit margins of at least 20 per cent, while iWoca would seek for
businesses with at least four months of trading history, earning of at least 10,000 annually, but with no set
profit margin.

Learn from the experiences of fellow SMEs. Interest rate is not the only factor to weigh in when making
such an impactful decision. Its also about the service, the ease of use, early repayment policies, and the
overall experience.

As a rule of thumb, cash advances are more expensive than other forms of lending. Although they might be
the quickest and easiest form, they will also carry the highest interest. Avoid those if you can get funding
from other sources.
To shorten the alternative business funding comparison even further, we recommend to browse
through business lender reviews. You may find a lot of the relevant information you need there.

Further reading on alternative finance

Banks may be lending again, but alternatives continue to thrive

Related topics: Crowdfunding

Legal documents for small businesses

jotucker
Technical Director
clickdocs.co.uk
Blogger
Share this content
22nd Mar 2013
0
If you are self-employed or running your own business then you probably have
already talked with and maybe engaged the services of other professionals during
the course of business. Maybe you have an accountant to help with the books, do
your VAT and annual tax returns. Perhaps you had a website professionally
created for you. Maybe you hired a solicitor to help you set up a limited company
or draw up a commercial lease. Which of those professional services cost you the
most? I bet it was the solicitor.
Advertisement
Im not knocking solicitors: good solicitors are worth their weight in gold. But gold is a pretty
expensive commodity. Sometimes other solutions are worth considering. Ill lay my cards on the
table here my website sells template legal documents so Im all for DIY law. The fact is, many of
the legal aspects of setting up and running a small company are straightforward and unless you have
unusual requirements a template solution exists and will almost always be cheaper than engaging the
services of a solicitor.

A DIY approach
So, what things can you do yourself? These are some of the business activities than can lend
themselves to a DIY approach:

Setting up a limited company

Setting up a limited company is straightforward if youre happy to accept the 'model' (i.e. default)
articles of association you can incorporate online at Companies House for 15. To use your own
articles of association (and there are good reasons why you might want to) is not much more difficult
and costs 40. You can also buy an off-the-shelf limited company from any of a huge number of
websites for not much more than incorporating one yourself.

Setting up a partnership
If you choose to set up a (unincorporated) partnership or limited liability partnership rather than a
limited company then this is also easy to do. A traditional partnership has similar status to a sole
trader and does not need to be registered with Companies House a simple, single Partnership
Agreement document is all that is required. Setting up a limited liability partnership is more like
forming a limited company various forms have to be completed and submitted to Companies
House. In either case, you can find plenty of information online including template documents.

Employing staff
Once your business grows to the point that you are ready to employ staff there are a range of other
legal documents you will probably need, the main one being a contract of employment.

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You dont have to have a written employment contract but it is good practice to do so. At the very
least, you have to provide any employee who works for you for at least 1 month with a written set of
employment particulars within 2 months of starting work. The employment particulars are usually
included within a written contract of employment, setting out all the terms of employment.
A contract of employment, for the majority of small business employers, is a standard document and
lends itself to a template approach. As ever, if your requirements are specialised then you may need
legal advice.

Engaging a consultant
If you want to engage the services of a consultant (e.g. a business coach, IT consultant, Health and
Safety Consultant, Marketing consultant etc.) then you almost certainly will need some form of
contract between your business and the consultant. You can let the consultant provide a contract for
you to sign or you can provide your own (making sure the terms suit your business). A contract to
engage the services of a consultant is often a fairly standard document and lends itself to a standard
template.

Defining your terms and conditions of sale

Whether your business sells goods, services or both; sells from a shop, door-to-door or over the
internet you would be wise to set out your terms and conditions of sale in a written document. When
selling online you are legally required to have your terms and conditions available on your website for
inspection by your customers. Bricks 'n mortar businesses arent subject to the same law but, all the
same, a written set of T&Cs makes good business sense.
Unless your business sells unusual goods or services you can probably find a suitable template for
terms and conditions of sale from an online legal documents provider.

DIY Suppliers
There are many websites from which you can buy legal document templates. You can also buy some
legal document templates in paper form from traditional stationers but these documents tend to be
things like wills and tenancy agreements rather than business legal forms.
Before you buy an online legal document template, satisfy yourself that:

The document suits your requirements

The document is drafted for the UK and is up-to-date with all current legislation
The document has been professionally drafted
You are buying from a reputable company.
If in doubt, contact the website first and ask about the suitability of their document
for your business.
Joanne Tucker
www.clickdocs.co.uk

The 10 Key Legal Documents for

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Documents play an essential role in protecting the interests of the business

and business owners over the course of a companys lifetime. Here is a list of
the 10 most common legal documents to help you determine what your
business needs.

1. Company bylaws for corporations. Most states require corporations to

keep a written record of bylaws, although you dont need to file the
document with a state office. Bylaws define how the company will govern
itself. Even if your company is incorporated in the handful of states that dont
require bylaws, they are still a good idea as they spell out your business
structure, individual roles, and governance issues. For example, bylaws can
help settle a dispute on the length of a directors term or define if you need a
simple majority to approve a decision.
Related: The Legal Ins and Outs of Forming a Partnership
2. Meeting minutes. Most states also require corporations to document what
happens at major meetings. They keep an official account of what was done
or talked about at formal meetings, including any decisions made or actions
taken. They can help settle a dispute about what happened or didnt happen
in a past meeting.
Your minutes should be detailed enough to serve as your corporations
institutional memory. They should include: type of meeting; time and place
of meeting; detailed attendance; all actions taken (purchases, elections, etc.);
as well as any votes including how everyone voted and who abstained.
3. Operating agreement for LLCs. Although not required in most states, an
operating agreement is recommended for every LLC, particularly when there
are multiple members involved. This document outlines an LLCs financial
and functional decisions. If there is more than one member, it becomes all the
more important to define how key business decisions will be made, how
profits and losses will be distributed, what are the rights and obligations of
members and what happens when someone wants out of the business. Once
members sign the document, it becomes an official, binding contract.
4. Non-disclosure agreement. Whether you realize it or not, your business
has information that should remain private, such as customer list, financial

records, or ideas for a new pricing plan. An NDA is your first line of defense
to protecting this information. This legal document creates a confidential
relationship between your business and any contractors, employees, and
other business partners who might get a behind-the-scenes look at your
operations.
Related: Rocket Lawyer: Cutting Out Small Business Attorneys' Fees
5. Employment agreement. This contract sets the obligations and
expectations of the company and employee in order to minimize future
disputes. Not every hire requires an employment agreement, but the
document can be a useful if you want to dissuade certain new hires from
leaving your company too soon, disclosing confidential information about
your business, or going to work at a competitor. The contract should be
reviewed by an experienced employment law attorney before given to an
employee to sign.
6. Business plan. A business plan may not be a legal document, but its
required should you ever decide to seek financing or sell your business. Your
business plan can be one page or a hundred pages, as long as it provides
clarity on your business opportunity and your roadmap to get there.
7. Memorandum of understanding. An MOU falls somewhere between a
formal contract and a handshake. It documents any important conversations
you have with suppliers, potential partners and others involved in the
business. MOUs are great ways to lay out the terms of a project or
relationship in writing, but do not rely on the document to be legally
binding.
8. Online terms of use. While not required by law, any business with a
website should include their terms of use. These pages can limit your liability
in cases where there are errors in your own content, as well as information
contained in any hyperlinks from your website. Furthermore, your Terms

should let visitors know what they can or cant do on your site, particularly in
cases where visitors can comment on blogs or share their own content.
9. Online privacy policy. If you gather any information from your customers
or website visitors (such as email addresses), you are legally required to post
a privacy policy that outlines how this information will be used and not
used.
10. Apostille. Businesses involved in international trade with other Hague
Convention countries may need a certificate, known as an "apostille,'' that
authenticates the origin of a public document (like articles of incorporation)
so they can be recognized in another country. Apostilles are only valid in
countries that are members of the Hague Convention.
In most cases, you dont need to create any of these documents from scratch.
You can find free templates online to serve as a starting point. While these
legal documents are important part of staying compliant with your state
requirements, they are more than empty formalities. By taking the time to
think about the various elements on each document, you are setting the right
foundation for your business.

Choose a legal structure

for your business
1. Overview
2. Sole trader
3. Limited company
4. 'Ordinary' business partnership
5. Limited partnership and limited liability partnership
6. Unincorporated association
7. Change your business structure

1. Overview
You must choose a structure for your business. This structure will
define your legal responsibilities, like:

the paperwork you must fill in to get started

the taxes youll have to manage and pay
how you can personally take the profit your business makes
your personal responsibilities if your business makes a loss
You can change your business structure after youve started up if you
find a new structure suits you better.
Types of business

The main types are:

sole trader
limited company
business partnership
You can form an unincorporated association if youre setting up a
small organisation like a sports club or a voluntary group and dont
plan to make a profit.
You can use other structures for businesses that help people or
communities, eg social enterprises.

Choose a legal structure

for your business
1. Overview
2. Sole trader
3. Limited company
4. 'Ordinary' business partnership
5. Limited partnership and limited liability partnership
6. Unincorporated association
7. Change your business structure

2. Sole trader
If you start working for yourself, youre classed as a selfemployed sole trader- even if youve not yet told HM Revenue and
Customs (HMRC).
As a sole trader, you run your own business as an individual. You can
keep all your businesss profits after youve paid tax on them.
You can employ staff. Sole trader means youre responsible for the
business, not that you have to work alone.
Youre personally responsible for any losses your business makes.
Find out how to set up as sole trader.
Tax responsibilities

You must:

send a Self Assessment tax return every year

pay Income Tax on the profits your business makes
pay National Insurance
You must also register for VAT if you expect your takings to be more
than 82,000 a year.

Choose a legal structure

for your business
1. Overview
2. Sole trader
3. Limited company
4. 'Ordinary' business partnership
5. Limited partnership and limited liability partnership
6. Unincorporated association
7. Change your business structure

3. Limited company
A limited company is an organisation that you can set up to run your
business - its responsible in its own right for everything it does and its
finances are separate to your personal finances.
Any profit it makes is owned by the company, after it pays Corporation
Tax. The company can then share its profits.
Ownership

Every limited company has members - the people or organisations

who own shares in the company.
Directors are responsible for running the company. Directors often
own shares, but they dont have to.
Legal responsibilities

There are many legal responsibilities involved with being a director

and running a limited company.
Types of company

Limited by shares
Most limited companies are limited by shares. This means that the
shareholders responsibilities for the companys financial liabilities are
limited to the value of shares that they own but havent paid for.
Company directors arent personally responsible for debts the
business cant pay if it goes wrong, as long as they havent broken the
law.

Example
A company limited by shares issues 100 shares valued at 1 each
when its set up. Its 2 shareholders own 50 shares each and have
both paid in full for 25 of these.
If the company goes bust, the maximum the shareholders have to pay
towards its outstanding bills is 50 - the value of the remaining 25
shares that theyve each not paid for.
Private company limited by guarantee
Directors or shareholders financially back the organisation up to a
specific amount if things go wrong.
Public limited company
The companys shares are traded publicly on a market, such as the
London Stock Exchange.
You can also consider setting up a private unlimited company as an
alternative legal structure. Directors or shareholders are liable for all
debts if things go wrong.
How to set up a limited company

You must register the company with Companies House and let HM
Revenue and Customs (HMRC) know when the company starts
business activities.
Read more about setting up a private limited company.
Tax responsibilities

Every financial year, the company must:

put together statutory accounts

send Companies House an annual return
send HMRC a Company Tax Return
The company must register for VAT if you expect its takings to be
more than 82,000 a year.
If youre a director of a limited company, you must:

fill in a Self Assessment tax return every year

pay tax and National Insurance through the PAYE system if the
company pays you a salary

Choose a legal structure

for your business
1. Overview
2. Sole trader
3. Limited company
4. 'Ordinary' business partnership
5. Limited partnership and limited liability partnership
6. Unincorporated association
7. Change your business structure

4. 'Ordinary' business partnership

In a business partnership, you and your business partner (or partners)
personally share responsibility for your business.
You can share all your businesss profits between the partners. Each
partner pays tax on their share of the profits.
Partnerships in Scotland (known as firms) are different, and have a
legal personality separate from the individual partners.
Legal responsibilities

Youre personally responsible for your share of:

any losses your business makes

bills for things you buy for your business, like stock or equipment
You can set up a limited partnership or limited liability partnership if
you dont want to be personally responsible for a business losses.
A partner doesnt have to be an actual person. For example, a limited
company counts as a legal person, and can also be a partner in a
partnership.
You must choose a name for your partnership and register it with HM
Revenue and Customs (HMRC).
Tax responsibilities

The nominated partner must send a partnership Self Assessment tax

returnevery year.

All the partners must:

send a personal Self Assessment tax return every year

pay Income Tax on their share of the partnerships profits
pay National Insurance
The partnership will also have to register for VAT if you expect its
takings to be more than 82,000 a year.

Choose a legal structure

for your business
1. Overview
2. Sole trader
3. Limited company
4. 'Ordinary' business partnership
5. Limited partnership and limited liability partnership
6. Unincorporated association
7. Change your business structure

5. Limited partnership and limited liability

partnership
Your liability for business debt differs depending on whether youre a
limited partnership or limited liability partnership (LLP).
You can share all the businesss profits between the partners. Each
partner pays tax on their share of the profits.
Limited partnerships

The liability for debts that cant be paid in a limited partnership is split
among partners.
Partners responsibilities differ as:

general partners can be personally liable for all the partnerships

debts
limited partners are only liable up to the amount they initially invest in
the business
General partners are also responsible for managing the business.
Read more about how to set up and run a limited partnership.

Limited liability partnerships (LLPs)

The partners in an LLP arent personally liable for debts the business
cant pay - their liability is limited to the amount of money they invest
in the business.
Partners responsibilities and share of the profits are set out in
an LLPagreement. Designated members have extra responsibilities.
Read more about how to set up and run an LLP.
Tax for limited liability and limited partnerships

Every year, the partnership must send a partnership Self Assessment

tax return to HM Revenue and Customs (HMRC).
All the partners must:

send a personal Self Assessment tax return every year

pay Income Tax on their share of the partnerships profits
pay National Insurance
You must also register the partnership for VAT if you expect your
businesss takings to be more than 82,000 a year.

Choose a legal structure

for your business
1.
2.
3.
4.

Overview
Sole trader
Limited company
'Ordinary' business partnership
5. Limited partnership and limited liability partnership
6. Unincorporated association
7. Change your business structure

6. Unincorporated association
An unincorporated association is an organisation set up through an
agreement between a group of people who come together for a
reason other than to make a profit, eg a voluntary group or a sports
club.

You dont need to register an unincorporated association, and it

doesnt cost anything to set one up.
Individual members are personally responsible for any debts and
contractual obligations.
If the association does start trading and makes a profit, youll need to
payCorporation Tax and file a Company Tax Return in the same way
as a limited company.

Choose a legal structure

for your business
1. Overview
2. Sole trader
3. Limited company
4. 'Ordinary' business partnership
5. Limited partnership and limited liability partnership
6. Unincorporated association
7. Change your business structure

7. Change your business structure

What you need to do depends on the type of business, if youre VATregistered and if you employ people.
Set up the new structure

Follow the normal steps to setting up as a:

sole trader
business partnership
limited company
limited partnership
limited liability partnership (LLP)
Tell HM Revenue and Customs (HMRC)

If youre VAT-registered, you must tell HMRC within 30 days of the

change or else youll face a penalty.
You will need to either:

cancel your VAT registration and re-register

transfer your existing VAT registration
You can do this online or send a form to HMRC by post. The address
is on the form.
If you employ people, youll also need to talk to HMRC about the
change.
Sell your business

If youre a self-employed sole trader, in a partnership or own a limited

company, there are certain rules you must follow when you sell your
business.
Close an existing structure

If you want to close down your existing business structure, follow the
usual steps.
To no longer be a sole trader
Youll need to:

tell HMRC youre no longer going to be self-employed and theyll

cancel your Class 2 National Insurance contributions
complete a Self Assessment tax return as usual (youll then start to
submit tax returns the next year for your new business structure)
To close a business partnership
Youll need to make sure your nominated partner fills in a tax
return when the partnership ends.
If the business partnership will continue without you as a partner, you
must still complete a Self Assessment tax return as usual. Youll then
start to submit tax returns the next year for your new business
structure.
To close a limited company
Youll either need to close your limited company or make it dormant.
Changing to a public limited company or an unlimited company

The guidance has information on changing a limited company to a

public limited or unlimited company.

Types of registered companies

The following are the various types of registered company. Apart from these, a business may be
set up as a sole trader (self-employed person), as a partnership or as a limited liability
partnership (LLP). Each format has its advantages and disadvantages. Incorporation Services
Limited provides an expert service for all your company formation and company law
requirements and there are more details about these types of companies on the ISL website.

Private companies limited by shares

Public limited companies (PLCs)
Property management companies
Companies Limited by guarantee
Unlimited companies
Limited Liability Partnerships (LLPs)
Community Interest Companies (CICs)
Charitable Incorporated Organisation (CIO)
Right to manage (RTM) companies
Conversion from one type of company to another

Private companies limited by shares

The vast majority of trading companies are private companies limited by shares. There are over
two million such companies registered at Companies House. A private company limited by
shares must have the word 'Limited' or 'Ltd' at the end of its name. The main advantage of
trading through a limited company is to have limited liability.
Many private companies are very small. There is no minimum capital requirement for a private
company and it is commonly less than 100. Approximately 90% of private companies are small
or medium sized companies which means that they can file modified (i.e.
simplified) accounts at Companies House, rather than full accounts.
A private company may not offer shares or debentures to the public: CA 2006, sec755, only a
public company (PLC) may do so.
For more advice on the practical aspects of forming a private limited company go to
the Incorporation Services Limitedwebsite.
Public Limited Companies (PLC)
A small proportion of companies are public companies. Such a company must have a name
ending in the words 'public limited company' or 'PLC'. This type of company is appropriate for
larger businesses where shares are intended to be available to the general public. Most public
companies are not set up as such but are converted from private ones.
A public company must have a minimum share capital of 50,000, of which at least one-quarter
plus any share premium must be paid up before the company can obtain its trading certificate
from Companies House and start trading. This is the only type of company which may raise
capital by offering securities (shares or debentures) to the public. This is usually done by
obtaining a listing on the Stock Exchange or another public market such as the Alternative
Investment Market.
Public companies are subject to more stringent legal requirements than private companies on a
wide range of matters, but especially in relation to share capital, directors and accounts.

For more advice on the practical aspects of setting up a PLC, or converting an existing private
company into a PLC, go to the Incorporation Services Limited website.

Property Management Companies

A property management company is a type of private limited company. Such a company will be
set up in order to hold an interest in property which is divided into units, each unit being owned
separately. A typical example is a large house divided into a number of flats, each flat being
owned by one or two people. There will usually be a need for somebody to own the building as a
whole, including common parts such as stairways, gardens, access paths etc. Unless there is a
landlord retaining this interest, the simplest legal device is for a company to be set up to own the
freehold of the property, and for each owner of a flat to have an interest in the company.
Most property management companies are private companies limited by shares with appropriate
articles of association, though some are limited by guarantee.
Some property management companies will do no more than hold the title to property and so can
be considered asdormant companies under the Companies Acts, allowing pro forma dormant
company accounts to be registered atCompanies House. This helps keep administration costs to
a minimum and is useful where where the property is small with little or no routine maintenance
which can be arranged between the owners of the flats without involving the company.
For more advice on the practical aspects of forming a property management company and
running it once registered, go to the Incorporation Services Limited website.

Companies Limited by Guarantee

The Community Companies website has much more detailed information about
companies limited by guarantee, charitable companies, community businesses,
community interest companies and related topics.
A company limited by guarantee is private company, very like a private company limited by
shares, but it does not have a share capital. It is widely used for charities, clubs, community
enterprises and some co-operatives. The vast majority of such companies are non-profit
distributing, but they do not have to be.
A company limited by guarantee is registered at Companies House, has articles of
association, directors, etc., and is subject to all the requirements of the Companies Acts (except
those relating to shares). There are no shares and so no shareholders, but such a company does
have members, who meet and control the company through general meetings. The directors are
often called a management committee or council of management, etc. but in law are still
company directors and subject to all the rules that affect other directors.
A company limited by guarantee confers limited liability as effectively as a company limited by
shares. The articles state that the members guarantee to pay its debts, but only up to a fixed
amount each. Usually that sum is 1, and no member can be liable for more than that amount if
the company fails.
For more advice on the practical aspects of forming a company limited by guarantee, and the
uses of such companies, go to the Community Companies website.

Unlimited companies
Many people refer to a sole trader's business or a partnership as an unlimited company, but such
businesses are not in fact companies. It is possible to register at Companies House a private

company which is unlimited, that is the members accept complete liability for the company's
debts. If the company needs money to pay its debts a call can be made on each of the
shareholders to contribute a fixed amount on each share held by them.
An unlimited company has all the other features of a private company limited by shares. It is
registered at Companies House, has members (usually shareholders), directors, articles, etc. Its
one major advantage is that it is not required to register annual accounts at Companies House.
This type of company is suitable for a business where the risk of insolvency is very low or nonexistent, or where it is important not to put the company's accounts on the public register at
Companies House. There are few unlimited companies, but this may be because their existence
and advantage are not widely appreciated.
For more advice on the practical aspects of forming an unlimited company company and running
it once registered,contact Incorporation Services Limited.

Limited Liability Partnerships (LLPs)

Incorporation Services Limited registers LLPs
The limited liability partnership is a comparatively new type of business structure which became
available in 2001. It is a hybrid between a private company limited by shares and a partnership.
An LLP is a separate legal entity conferring full limited liability on its members. It is created by
registration at Companies House. There must be at least two members, but there is no upper
limit. An LLP is subject to the same rules as a private limited company for the registration
of accounts at Companies House, and the auditing of its accounts. The same exemptions from
these requirements are available.
The Act does not impose a structure for the management of an LLP. There are no statutory
provisions for general meetings, directors, company secretary, share allotments, etc. As with a
common law partnership, these are matters for the LLP agreement. There is no statutory
requirement to register (or even to have) a written LLP agreement, but such an agreement is
essential in practice. The LLP is treated for tax purposes as an ordinary partnership: i.e. each
partner is liable to income tax for his or her share of the profits, and to Capital Gains Tax in
respect of any gains made on the disposal of assets by the LLP. Click here for more details on
LLPs. For the formation of an LLP, go to theIncorporation Services Limited website. For LLP
agreements go to the Company Law Solutions website.
Community Interest Companies (CICs)
The Community Companies website has much more detailed information about CICs as
well as companies limited by guarantee, charitable companies, community businesses
and related topics.
Community Interest Companies are a relatively new type of company (from 2005) which can only
be registered for objects which are for the good of the community. The Companies (Audit,
Investigations and Community Enterprise) Act 2004 ('the Act'), and The Community Interest
Company Regulations made under the Act, establish the legislative framework for CICs.
Apart from having to have objects that benefit the community, the two main features that
distinguish CICs from 'normal' companies are the asset lock and the Community Interest
Statement and Report. Under the asset lock provisions, the assets and profits must be
permanently retained within the CIC, and used solely for community benefit, or transferred to

another organisation which itself has an asset lock, such as a charity, or another CIC. With every
application to form a CIC, a Community Interest Statement must be lodged, with the usual
documents, when seeking company registration. This statement, signed by all the directors, must
describe the company's objects and certify that the company is formed to serve the community
rather than for private profit. CICs can be limited by shares or by guarantee. For more
information about CICs, go to the Community Companies website.

Charitable Incorporated Organisations (CIOs)

This new type of company became available for registration in England and Wales from 10th.
December 2012.It has been available in Scotland since 1st. April 2011. Charitable Incorporated
Organisations (CIOs) were brought into being by the Charities Act 2006. Detailed regulations are
in the Charitable Incorporated Organisations (General) Regulations 2012 SI 3012. It became
possible to submit applications for registration from 10th. December 2012 in England and 1st.
April 2011. CIOs are designed to be a more efficient way to register an incorporated charity. Until
CIOs became available a charity that wished to be incorporated (and so have limited liability) had
to register as both a company limited by guarantee and as a charity. Using a CIO should be
simpler to incorporate and run as it will be registered with just one body (the Charity
Commission) and will only have to submit one annual return and one set of accounts per
year. Further details are on the Charity Commission's CIO Page for CIOs in England and Wales
and from the Office of the Scottish Charity Regulator for CIOs in Scotland. Community
Companies CIC offers a full package of services for CIOs, from first registration to secretarial and
other drafting work.

Right to Manage (RTM) Companies

The Commonhold and Leasehold Reform Act 2002 provides a right for leaseholders to take over
the landlord's management functions by transferring them to a special company set up for the
purpose, the Right To Manage (RTM) company. The right was introduced to empower
leaseholders, who generally hold the majority of value in the property, to take responsibility for
the management of their block. It applies only to leaseholders of flats, not of houses. The
process is relatively simple. The landlord's consent is not required, nor is any order of court. The
right is exercised by the service of a formal notice on the landlord. After a set period of time, the
management transfers to the right to manage company (the RTM company) which has been set
up by the leaseholders. Once the right to manage has been acquired, the landlord is also entitled
to membership of the company.
We cannot advise about putting the process into effect, but we can set up the RTM Company.
There are special regulations in the RTM Companies (Model Articles) (England) Regulations
2009 as to the contents of the articles of association.
Contact Incorporation Services Limited for the electronic registration of a Right To Manage
Company.
Conversion from one type to another
Company Law Solutions provides company conversion services
A private company limited by shares can be converted into a public company and vice versa, or
to an unlimited company. An unlimited company can be converted to a private company limited
by shares. A company limited by guarantee cannot be converted to a company limited by shares

or vice versa.
Existing companies can convert themselves into CICs but such conversions require the approval
of the CIC Regulator. Where the company converting to a CIC is a charity, the permission of the
Charity Commission is needed for a change of name.
For more advice on the practical aspects of converting one type of company to another, please
contact Company Law Solutions.

TYPES OF COMPANY
The following gives a brief guide to the various types of companies that can be incorporated in the UK and
their various principal characteristics. More detailed information can be found under each separate heading
within this section and in the customer support section. Use this list and the links provided to help decide
which company formation you need.
The types of company we can incorporate for customers include:

Private Company Limited by Shares

Ready Made Private Limited Company

Private Company Limited by Guarantee

Public Limited Company

Limited Liability Partnership

Flat Management Company

Right to Manage Company

Community Interest Company

Private Company Limited By Shares

Private Limited Company

Normal commercial trading purposes

Objects unrestricted

Suits the majority of requirements in the UK

Can undertake any nature of business

Can operate anywhere in the world

Members have limited liability

Can have a sole director and sole shareholder

Can have corporate officers

Limited companies are often advantageous for their shareholders regarding taxation

Incorporated within hours

Own choice of name

click here for more information

Ready Made Private Limited Company

As above but registration number available immediately upon receipt of payment

Takes longer to complete registration of new directors and transfer shares to new owners

More expensive

Restricted choice of name

click here for more information

Private Company Limited by Guarantee

Non-profit corporate entity assets or financial surplus cannot be distributed to members

A Guarantee company is not owned by its members and cannot be transferred by its members for
value it has no share capital

Suitable for clubs, membership organisations, sports associations etc

Can apply for charitable status

Members have limited liability

Can be incorporated in most circumstances within hours

Some input required from client to establish main objects if required or objects can be unrestricted

click here for more information

Public Limited Company

Necessary if the company is to trade its shares to the public

Can undertake any nature of business

Can operate anywhere in the world

Members have limited liability

Can be incorporated in most circumstances within hours

Own choice of name

High initial capital commitment

Must have at least two directors and one shareholder

A private company can be converted to a PLC, so most PLCs start life as normal private companies and
convert at a later date prior to flotation of the stock markets

click here for more information

Limited Liability Partnership

Suitable for new and existing partnerships wishing to obtain limited liability status, and aimed
particularly at professional partnerships such as accountancy and solicitors firms

Maintains tax status of a partnership

Members have limited liability

Can be incorporated in most circumstances within hours

Suitable for most commercial business activities

click here for more information

Flat Management Company

May be either a company limited by shares or a company limited by guarantee

Beneficial for property developers planning to sell flats or apartments in a development once
completed

Can be used to spread the freehold of a number of flats across the individual owners allowing easy
transfer and sale of each flat

Can be used purely as a vehicle to manage the maintenance of a property comprising of several flats
or apartments

click here for more information

Right to Manage Company

A form of company limited by guarantee

Allows leaseholders to purchase freehold properties or acquire the rights to manage a property under
the Commonhold and Leasehold Reform Act 2002

Applies where a building is sub-divided into two or more flats or tenancies

Uses prescribed Articles of Association

click here for more information

Community Interest Company

Can be either limited by shares, limited by guarantee or a public company

Intended for use by social enterprises who wish to utilise their profits and assets for public benefit

Requires approval from the CIC Regulator before incorporation

Cannot have charitable status

click here for more information