Business Types: What are they, and why does it matter?

Many equestrian businesses, from retail to services, all start out as sole traders. It makes sense at the outset – it is a low cost way to discover whether your business will work. However, often people overlook the importance of reviewing their business structure and arrangements once they have achieved proof of concept. While entirely understandable, for long term success and security it is critical to ensure that your business has an appropriate structure.

Common Business Structures

1.     Sole trader

As a sole trader (or self-employed), you can operate very simply. Your business income becomes part of your overall declared income. You can employ people, provided that you comply with applicable law and hold relevant insurance, and you keep all after-tax profits. The paperwork is straightforward, so most people choose to manage their own returns.

However – every contract your business signs is made in your name. Your business and personal finances are not legally separate. This means that if your business is sued or in debt, you become personally liable. If you are a homeowner, you are, in effect, betting the house.

2.     Partnerships

As your business grows, you may find yourself looking collaborate with likeminded people, perhaps providing similar goods or services, or offering products or services which sit well alongside your own. If you are sole traders, the simplest way to amalgamate is as a partnership.

In a partnership, individuals sign a partnership agreement to establish how the business’s ownership, profits and liabilities are shared between them, and how partners exit the partnership. Each partner submits a separate tax return.

The success of a partnership hinges on how well the partnership agreement has been prepared: a good lawyer should understand the commercial rationale of the relationship. However, if the partnership is sued, all partners are jointly responsible for the debts or claim. So, perhaps you are betting the kitchen rather than the whole house – although you may end up with one of your partners betting the kitchen for you…

3.     Limited company

Incorporating as a limited liability company sounds intimidating – but it should not. It is a simple process, and with a company in place you create a separate legal personality. This means that the liabilities of the company are both limited and separate from your own personal finances. Income from the company is also subject to different tax treatment.

It is fine to set up a company with one director and shareholder (both being you); equally you can bring in investors, buying shares in the company, as your business develops. At this stage legal advice is required to review the standard Articles, and prepare an agreement between shareholders which sets out what level of influence on the company is appropriate for different levels of share ownership. There is no set pattern to how these arrangements should be constructed – however I would recommend avoiding a 50:50 split. In the event of disagreement, a deadlock can inhibit a company’s growth.

As you transition to a company, all your commercial contracts should move across so that the company is a party, and not you personally. This can be done gradually, as contracts expire and are renewed, or managed more assertively by assigning or novating contracts. You may need legal assistance to complete this, but it is an important part of the company “housekeeping”. Any insurance you hold must be transferred into the company’s name before you start trading using the company.

4.     Limited Liability Partnerships

These are a hybrid business form, developed for businesses traditionally using partnerships seeking to limit their liability.

There is increased administration, however each partner files their own tax return. This model limits liability, but success will depend on how well the LLP agreement is prepared.

How does the choice of structure impact my business security?

In any business offering products or services which can be scaled and are not unique to you personally, once established a business owner will often consider – what next?

If your business structure is well considered and documented, then you are better placed to evaluate the impact of any transformation such as significant investment, or a partial buy-out; and to ensure that the valuation and terms of such a transaction reflect favourably. Sadly many small business owners find that their businesses are valued disappointingly, simply because there is no proper partnership agreement or shareholder agreement, or their key clients have not signed effective commercial contracts. Equally, some operate using old contracts, which in practice are long superseded but without amendment, so valuation is hard to prove.

With the prospect of transformational change to a business it can be difficult to renegotiate or introduce sensible terms, either internally or externally. To secure the value in your business, make sure your contractual arrangements are effective and reflect your actual operations.  

First published in Equestrian Trade News in May 2024. Aria Grace Law CIC undertakes no obligation to update this information following publication.