Tahir's Tips: Choosing Your Fashion Business Structure

So, your new designs are starting to gather interest from fashion houses, you can’t keep up with demand and need to hire some help, or you’re looking for investment in your new fashion business. Chances are you started out in the fashion industry as “a sole trader” (see below for what that means), but if any of the above is happening it’s probably time to consider registering your business as either a limited company or a limited liability partnership (LLP).

First of all however, let’s discuss the advantages and disadvantages of remaining as a sole trader. Doing business as a sole trader is the simplest – and cheapest – medium through which to run a business. There are no set up costs and no obligations to maintain or register accounts. If you are selling clothes on a market stall or through an online shop yourself you are likely to be operating as a sole trader. When you sell your goods each customer is entering into a contract with you personally as your business has no legal status or identity of its own. Therefore you are personally liable for each contract and should things go wrong the aggrieved customer or supplier will come after you personally for compensation. As your business grows and you start to enter into agreements with a larger number of suppliers, manufacturers, retailers, distributors etc. it is sensible to consider registering as a limited company or an LLP.

Firstly, the main benefit of operating your business as a limited company or as an LLP is that both limited companies and LLP’s are separate legal entities. This means that the company or LLP can own property in its own name but most importantly it can enter into contracts. Let’s say you own an online store selling clothes under the name Trendy Tops and you decide to set up a limited company with the same name, Trendy Tops Limited. Any contracts entered into from then on are done through the company Trendy Tops Limited and it is the company that is liable. Therefore, there is no risk to your personal assets if an aggrieved customer or supplier sues Trendy Tops Limited for damages.

The second benefit of conducting business through a limited company or an LLP is that the shareholders of a company and the members of an LLP all enjoy limited liability. This means that should the business go bankrupt, your personal assets will not be at risk from creditors and people the business owes money to.

The third benefit is that companies and LLP’s are more attractive to investors. Many lenders will prefer to lend to companies and LLP’s since they are subject to a higher degree of regulation and disclosure (discussed below), and therefore the lender may feel comfortable that it has full information against which to measure the risk it is undertaking in lending to a company or LLP is large or small.

The final benefit can be seen in terms of taxation. There are a number of tax benefits enjoyed by companies and LLP’s. For example, you can claim a wide range of expenses. Anything that is solely classed as a business cost can be claimed back on expenses. Trading through a company or an LLP means you can claim on a wider range of expenses such as accountancy fees, equipment, software, phones, travel, internet and much more. Also, companies and LLP’s are entitled to the Flat Rate VAT scheme which can generate thousands of pounds of extra profit a year.

However, limited companies and LLP’s do have some disadvantages. The main disadvantage of setting up a limited company or an LLP is the costs involved with registration. There are also on-going costs and obligations involved with running a company or an LLP as there is an increased level of regulation involved. These regulations also extend to the greater level of disclosure required by companies and LLP’s. For example, there is the requirement to file annual accounts and also to disclose the names and addresses of company shareholders and directors as well as LLP partners.

For more information on Industry member, Tahir visit his personal partner page on the Sheridans website. To contact him directly, visit The Industry Directory, email [email protected] or telephone 020 7079 0103.