What should we do??

Shawn1983

Hi all,

I have a question regarding the classification of a preposed small business between me and a friend of mine.

We are both electricians whom work full time for other companies, as we work shifts we plan on working "on the side" doing private work. We have a few friends that can give us a fair amount of work so need to do it by the book.

We will open a business account at the bank for invoice to be paid into etc. But what i want to know is when we start and declare ourselves a business what would we be? Sole trader (surely thats for one person?), partnership? (Sounds the most obvious).

BUT.... my colleague was declared bankrupt a year or so ago, he has been told he is out of it now (used a word to describe it but cant think for the life of me what it was). But i was under the impression he cant be part of a partnership if bankrupt?

If this is the case is there anything we can do so that there is a 50/50 responsibility for the company as otherwise it'll all be on me!

Thanks
Sparky

pipscot

Shawn1983 wrote: »

Hi all,

I have a question regarding the classification of a preposed small business between me and a friend of mine.

We are both electricians whom work full time for other companies, as we work shifts we plan on working "on the side" doing private work. We have a few friends that can give us a fair amount of work so need to do it by the book.

We will open a business account at the bank for invoice to be paid into etc. But what i want to know is when we start and declare ourselves a business what would we be? Sole trader (surely thats for one person?), partnership? (Sounds the most obvious).

BUT.... my colleague was declared bankrupt a year or so ago, he has been told he is out of it now (used a word to describe it but cant think for the life of me what it was). But i was under the impression he cant be part of a partnership if bankrupt?

If this is the case is there anything we can do so that there is a 50/50 responsibility for the company as otherwise it'll all be on me!

Thanks
Sparky

A discharged bankrupt can be a business partner - there's no reason why not.

To be honest, a partnership doesn't exactly mean that you only have 50% share in the responsibility for the business. Business partnerships are usually "joint and several liability" (apart from some "limited liability partnerships") meaning that all partners are equally responsible for bills etc in full. This means that a disgruntled client/supplier can pursue just one of the partners for the full amount of any outstanding invoice. It also means that you are equally responsible legally for any damage to clients' property etc no matter who caused the damage.

However, if you decide that a partnership is right for you (and it sounds like it would be difficult to operate as 2 sole traders) then you would need to register with HMRC as a partnership (and both partners need to register as self-employed).

Annisele

Firstly, is there anything in your contracts with your employers that prevents you from setting up on your own? (That wouldn't be unusual; some companies feel that if their staff are working as electricians then that work should be coming through their own books - you don't want to find that you can get a tiny bit of work on your own but get fired from your original job because of it).

Secondly, if you do go into partnership with your friend you will both be responsible for 100% of the debts; it won't be 50/50. So, if you and your friend between you owe me £100 and you don't pay, I'll go after whichever of you seems most likely to pay me - which might be both of you together, or it might be just you.

You could be a sole trader and employ your friend. If your business will want credit, that might be one way to go about it; even as a discharged bankrupt your friend's credit rating will be trashed.

Business Link might be helpful to you if you're in England. If you're somewhere else in the UK, there are links on that page to relevant organisations.

Shawn1983

Thanks for the replies,

So if we were to go down the partnership route what would the best way for taking money for ourselves from the account. We would both be in full time employment so paying tax through that as well but say we did a job and got £1000, can we just withdraw this from the company account a split it? As a partnership who is tax worked out? Does the company make a profit that we pay tax on, then we again each pay tax on what we take of that profit?

Seems like a lot of tax paying if so!! LOL

pipscot

Shawn1983 wrote: »

Thanks for the replies,

So if we were to go down the partnership route what would the best way for taking money for ourselves from the account. We would both be in full time employment so paying tax through that as well but say we did a job and got £1000, can we just withdraw this from the company account a split it? As a partnership who is tax worked out? Does the company make a profit that we pay tax on, then we again each pay tax on what we take of that profit?

Seems like a lot of tax paying if so!! LOL

Taking money out of the account - you'll need to come to some agreement about how to do this. Yes - in theory you can just withdraw the leftover money and split it (but remember to keep some in savings for your tax bill). Also you might want to think about how you're going to pay for supplies etc - not all the money that goes into the account is profit, you'll have expenses as well. You need to make sure your partner does not clear the bank account leaving you to pay the bills!

With regard to tax:
A partnership has a tax return of its own with the business accounts on. This will show how much profit the partnership made. Then the partners declare what their split of the profit will be (presumably 50/50 in this instance). Their share of the profit is then declared on their own personal tax return where their individual circumstances are used to calculate their tax liability.

E.g. partnership turns over £20,000 expenses are £8,000 leaving a profit of £12,000. Each partner declares £6,000 on their own tax return as profit from the partnership.

Each partner includes their PAYE earnings etc and any other income on their own tax return.

Premier_2

You need to have a very detailed chat with your potential business partner, and understand exactly what he has been doing in the past.

As another poster has said, if he is simply a discharged bankrupt, that won't affect him being your business partner. But you may find getting credit difficult if creditors find your partner is a recent bankrupt.
Furthermore, the reason your prospective partner was made bankrupt may be important. He seems to think he cannot run a business, which suggests maybe be was made bankrupt as part of some poorly run business in the past. That could have resulted in him being barred at present from running a business (but simply being bankrupted for say losing a job and so not keeping up repayments on a mortgage would not usually bar him from running a business - something like false trading running a previous business could well have him barred at present)

Also getting a bank account may be difficult when your partner is a recent bankrupt.


You may be better off running the business yourself and employing your colleague ... but your colleague may not be so happy with that rather one sided arrangement.

pipscot

Premier wrote: »

You need to have a very detailed chat with your potential business partner, and understand exactly what he has been doing in the past.

As another poster has said, if he is simply a discharged bankrupt, that won't affect him being your business partner. But you may find getting credit difficult if creditors find your partner is a recent bankrupt.
Furthermore, the reason your prospective partner was made bankrupt may be important. He seems to think he cannot run a business, which suggests maybe be was made bankrupt as part of some poorly run business in the past. That could have resulted in him being barred at present from running a business (but simply being bankrupted for say losing a job and so not keeping up repayments on a mortgage would not usually bar him from running a business - something like false trading running a previous business could well have him barred at present)

Also getting a bank account may be difficult when your partner is a recent bankrupt.


You may be better off running the business yourself and employing your colleague ... but your colleague may not be so happy with that rather one sided arrangement.

Agree with this - business partnerships can be tricky things!

Since your situation is not as straightforward as just setting up as a sole trader, you may want to consider having a consultation with an accountant or other business adviser.

If you do "employ" your partner, you would have to register as an employer with HMRC and pay tax/NIC on his earnings direct to HMRC.

Shawn1983

Thanks for the replies again,

I think like mentioned above a meeting with me and my mate with an accountant would be best first.

Thanks

Shawn

Savvy_Sue

Some excellent advice given, just want to emphasise:

Annisele wrote: »

Firstly, is there anything in your contracts with your employers that prevents you from setting up on your own? (That wouldn't be unusual; some companies feel that if their staff are working as electricians then that work should be coming through their own books - you don't want to find that you can get a tiny bit of work on your own but get fired from your original job because of it).

Absolutely! Even if there isn't anything in your contract, how hard would it be to find a reason to get rid of you if your employer doesn't agree with what you're doing?

pipscot wrote: »

Since your situation is not as straightforward as just setting up as a sole trader, you may want to consider having a consultation with an accountant or other business adviser.

I'd say that was essential. You may well be able to get a free half hour with two or three accountants to see what their suggestions for your 'structure' are. Longer term you might even want to use one to keep an eye on the company, to suggest when you should / should not take the profit out and the best way to do so etc.

But you might also want a properly drawn up legal partnership agreement. You won't need it until you're in dispute with your friend. Once that happens, it's too late, and it's a costly mistake to make!

pipscot wrote: »

If you do "employ" your partner, you would have to register as an employer with HMRC and pay tax/NIC on his earnings direct to HMRC.

Which for one other person isn't difficult, but it would add to the 'unequal partnership' situation: in this scenario you'd be able to fire him, but he wouldn't be able to get rid of you.