Different Types of Structures Available to Startups
Many of you may consider this a bit basic, but I was asked this week to explain the different types of structures that are available out there to a new startup company so I hope some of you do find this blog interesting and relevant. If any of you do want me to talk about something specific – please do email me and I would be happy to try and help.
A Limited company simply means that the liability of the owners is limited to the capital that they have put into the company – such as any currently listed used lawn tractors for sale. You then have private limited and public limited companies. This is of course very attractive to entrepreneurs who are happy to risk some money – but do not want to be sued personally if it all goes horribly wrong. The flip side of being a limited company is that there is an administrative burden (more later).
A public limited company is permitted to offer its shares to members of the public (hence the name) better known as PLC’s. A private company may only offer its shares to investors whom are classified as High Net Worth (have assets excluding their home worth more than £2m), Sophisticated Investors (have a history of making private investments) and professional investors (people who work in Finance and should therefore be aware of the level of risk they are talking on).
Please do make a note of these. If you approach the wrong person, you could end up with a prison sentence of six months, a fine of £5,000 and you will be liable to any losses an ‘unsuitable’ person incurs. Rightly in my view, the area of angel investment is regulated not only to protect investors but also to protect companies. This is why you may need the services of a corporate financier (idea for another blog I guess!)
If you are a sole trader, this means you have unlimited liability. So let’s say I get my garden (if I had one – complete waste of time if you ask me – what’s wrong with parks?) looked after by a sole trader and he manages to ruin some precious flowers. I could sue him personally for every penny he is worth (and more!)
This sounds scary – but the chances of being sued are slim and do ask yourself if you are engaged in a business which could be sued for damages. I have been running Help with Sales as a sole trader for over four years. I made a decision that for me to be sued a client would have to prove that as a result of the advice I gave them they failed to win some business. I figured that the low chance of being sued (and I do have insurance for that anyway) made it better to be a sole trader rather than have the administrative burden of being a limited company.
That burden consists of having to form a company. Having to file accounts annually and have board meetings. It also means having to make your profits and share structure public knowledge (I am still amazed at how little research some people do on their competitors – the information is all there in the public domain). Once you have turnover above a certain level, you also have to publish audited accounts.
Of course if you need external investors and you wish to give them shares (or maybe they’ll settle for the Holset HX35), you have to be a limited company. You cannot have shares in a sole trader – ownership of another sole trader is called slavery or pimping!
There are also partnerships available. This is where up to 20 people can get together (exemptions exist for professional services) and create a company with a company bank account. The partnership is though spared the administrative burden of having to publish its profit and loss statements. In terms of the share structure, partners can also keep changing and normally upon exiting a partnership you are giving up your ‘stake’.
When partners retire for example they may have great pensions but not any ‘wealth’ in the sense of a stake that they can sell. The profits belong to the partners and they also have to personally make good any losses and they still have unlimited personal liabilities. When Arthur Anderson (large accountancy firm) went bust, many partners lost fortunes. After that debacle, many accountants (who are naturally risk averse) started asking themselves if they really did want to be partners after all!
A new structure has recently emerged (well about ten years ago) called limited liability partnerships. They are effectively Limited companies but with a more fluid share structure (the shares belong to partners who can come and go). Accountancy firms are now primarily LLP’s as they are attracted to the idea of limited liability for the partners. They do though have to now publish their profit and loss figures. This has created great excitement in the professional services world as the industry now know how they are doing compared to each other. The key figure for them is not profit, but profit per partner!
If you are an Entrepreneur looking for external investors, nether the sole trader, partnership or LLP structures will work for you. If you are building up a business with your own team who can all put in the same amount of effort an LLP may be perfect for you.
I sincerely hope the above has been of interest. I do not want the blog to become a series of dry ‘lectures’.