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Setting up a new business

Dear Sirs,

A friend and I are soon to be opening our own business (Barber Shop) which will be a 50/50 partnership.  What is the best approach for us in terms of setting this up with companies house and HMRC, should it be a partnership, a limited company or is there a better alternative?

Kind regards

Ben Thomas 

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05th Dec 2018 14:29

It depends on lots of things. Look for a local accountant. You'll need one anyway, and that way you'll get the right advice from the start.
Try to cut corners and you could bitterly regret it.

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05th Dec 2018 14:36

Have to agree with Moonbeam. You start by saying it will be a 50/50 partnership =by definition this has nothing to do with companies house. And the decision on just what sort of business entity you choose will have significant consequences for both parties. So you really do need paid for professional help at the outset to get it right. It would be impossible from your brief question for anyone here to provide you with any more positive advice.

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By DJKL
to Kevkava
05th Dec 2018 14:41

But of course could relate to Companies House if an LLP was chosen.

I do concur with both of the above contributors, entity choice at outset is one decision that always should be closely considered and some professional input is very advisable.

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to DJKL
05th Dec 2018 16:04

True of course - but based on the question I guessed this hadn't been considered.

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05th Dec 2018 15:04

The thing is, Ben, you tell us nothing about your friend and yourself yet expect us to say what's the better route for your new business.

How much do you expect to earn ? What level of funding do you need for your private expenditure ? What risks do you foresee ? Do either of you have any other income ? Plus a hundred other questions.

When we tell folk to find an accountant, it's not because we're trying to whip up trade for someone we probably don't know anyway, it's because that's the best advice.

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05th Dec 2018 15:25

Best approach in terms of what?
You will get a different answer depending on what is important to you eg. tax, red-tape, protecting personal assets, image, simplicity.

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06th Dec 2018 11:44

Hi Ben

As already mentioned, with so many unknowns, this forum may not be the most efficient way to answer your question.

In addition to having a chat with an accountant, many of who will give you a free hour and so give you a good steer in that time, there is loads of information out on the web. Have you seen .GOV's https://www.gov.uk/set-up-business ?

If you are typical of many similar businesses that have approached me over the years, it is a case of anticipating the likely financial outcome of the business over the first year or two and then looking at the potential tax and National Insurance (NI) outcomes for either a partnership or Ltd company.

As a partnership you are effectively both self employed and so, at the end of the year, you report the partnership profit (ignoring anything you have taken out) which is then split between you to calculate individual tax and NI liabilities on your personal tax returns. In other words the partnership itself has no tax liability.

Alternatively, as a Ltd Company, it is the company that owns and runs the business and any profit it makes is taxable on it. You and your "partner" will typically have two roles, firstly as directors, who run the business and can draw salaries, and secondly as shareholders who sit back and wait for any surplus profits to be paid to them as dividends.

So for your personal tax you will typically be declaring salary and dividend income.

In the company's books, anything you draw as salaries are treated as a cost and therefore reduce its profits and tax bill whereas any dividends you draw, make no difference to the company's tax bill.

The various scenarios in these what-ifs are too many to summarise here but if you are not 100% sure of what the situation is likely to be then, generally, it's easiest and less costly to start everything as a partnership and then, if and when it makes sense to do so, transfer over to a Ltd company, later on.

Another key aspect, that many fail to cater for, is to decide, from day 1, what happens if one or both of you decide to call it a day. Believe me, I've lost count of the number of businesses (including my own) who started with the best of intentions towards making a go of the business only to fall apart a few years down the line when circumstances change or the "partners" fall out.

In a partnership, the rules for breaking it up are set in very basic and unhelpful legislation from the late 19th century and so, even if really basic, you should write down what will happen should one or both of you decide to call it a day. An accountant can help with a partnership agreement however there is free online content that can help you do this for yourself and you need then only ask for help on elements you are not sure of.

A Ltd company, on the other hand is its own boss and so directors and shareholders can come or go without, necessarily destroying the business. Also, the ways in which directors and shareholders come and go is set out in up to date and comprehensive legislation. This doesn't stop arguments and stalemate (especially with a 2 person company) and so, again, it's usually wise, to have something in writing over what happens should you fall out.

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to Paul Scholes
06th Dec 2018 12:01

Hi Paul,

Thank you very much indeed! That is by far the most informative and helpful reply I have had to date! I was aware that it wasn't a straight forward question and there are many variables to consider. You have given me a great starting point and some avenues to explore. I will seek the advice of an accountant who specializes in this field

Kind regards
Ben

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