UK Fact-File Part 1:
Business Formation for Individuals

1.8 UK Family Business Ownership

Types of ownership structure for individuals in business

An individual can trade as a sole trader, sometimes known as a sole proprietor, and they alone have responsibility for the business and the tax liabilities that ensue. The spouse of the sole proprietor can be paid a wage by the sole proprietor – with tax and NICs deducted as appropriate – thereby utilizing the personal annual tax allowance of both spouses.

Where a husband and wife are to run a business together, as a family business, they can also either do this as a partnership – in which case it is advisable to draw up a partnership agreement (not least in order to outline each partner’s stake in, and contribution to the business for HMRC) that can deal with allocation of profits and dividends – or as a limited liability company. In a partnership, each partner has joint responsibility for the debts and obligations of the business, and is responsible for their own portion of the profits, as outlined in the partnership agreement.

In the case of a limited liability company, each spouse could be a director of the company, though it is also an option that one spouse could be employed by the company in a non-directorial capacity (for example as manager). Details of share ownership would be stipulated in the documentation prepared when setting up a new business.

In terms of state involvement in a business start-up, in addition to providing grants and other types of support, the ‘Finance for Business’ scheme can provide financing in the form of loans or equity for businesses that have been unable to access such financing options from commercial banks or investors.

In the former Labour government’s last budget, delivered in March 2010, the creation of a new 'UK Finance for Growth' investment corporation was announced (including a new Growth Capital Fund, designed to provide qualifying 'fast growing' companies with private capital, eventually to the tune of around GBP500m overall).

However, the new Conservative-Liberal Democrat coalition government in July 2010 launched a green paper (consultation on which ended in September 2010) looking at alternative methods of financing for small businesses, and in November 2010, published its response to the comments received from the public and affected businesses.

It emerged that elements of the former government's plans for business development would be maintained, in particular those concerning growth funds, with a new Business Growth Fund initiative between the government and certain of the UK's banks designed to provide increased access to capital for small businesses, to the tune of GBP1.5bn. The Enterprise Finance Guarantee scheme will also remain in place until March 31, 2011.

In terms of private investment, if a ‘business angel’ (or wealthy private individual) can be persuaded that the business is a viable and attractive investment proposition, they may provide a fair chunk (or all) of the capital required to establish the business, usually in return for ownership equity, or convertible debt (a type of bond which can later be converted to shares). Your ‘angel’ may also be able to provide a degree of expertise and support, which could be invaluable to relatively inexperienced individual.

The government is also seeking to encourage business angel investment into high-growth SMEs via the use of a Regional Growth Fund co-operated by business angel groups and the government's SME investment arm, Capital for Enterprise.

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Fact-File

Part 1: UK Business Formation for Individuals

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