Risk taking is an essential part of being an entrepreneur. Examine the stories of most successful business people and you read about the time that they 'maxed out' a dozen credit cards in order to fund a new product which they were convinced would make them millions, or mortgaged their house to stave off creditors after a spectacular reverse. Having some skin in the game concentrates the mind like nothing else and drives people to make that extra effort to turn a good idea into a business success.
Traditionally a limited liability company has been seen as a means of protecting assets if all goes horribly wrong: creditors can't generally go behind the company to get at the shareholders directly. For larger ventures that remains good advice but for smaller start up projects a company can be a problem. People new to business don't instinctively understand the difference between them as individuals and their company and it is all too easy to mix up company and personal money and assets. Taxation is also a problem: although company tax rates are generally lower than the rates for sole traders the corporate model has many complications, including PAYE, benefits in kind, directors loan accounts and the interaction of taxes at the company and shareholder level.
The Office of Tax Simplification (OTS) has been looking at this problem and has made a recommendation that a new business structure is created - a sole enterprise with protected assets - SEPA (let's hope that somebody comes up with a better name). The idea is that a sole trader will be able to ring fence his/her family home from creditors without having to create a company. So he/she would continue to operate as now, and be subject only to income tax, but know that if the business failed his/her home would not be lost. The quid pro quo would be that the business would need to be formally registered as a SEPA and that anybody who traded with the business would have to be told about its status before entering into contracts.
I think that the idea has merit and I am pleased that the OTS has recommended that further work is done. It wouldn't suit everybody and the ambitious entrepreneur might still want to risk all in the attempt to make millions, but for a more cautious individual - say somebody in her fifties starting out on her own after years as an employee the idea of being able to start a business venture knowing that if all went disastrously wrong she would not lose the home which she had worked hard all of her life to pay for – it might well make give the impetus to plunge into the new world of business.
If the proposal does go ahead there would be a lot of detail to work out - not least how you define the family home and what level of regulation would be required. There is also the question of whether any other form of assets should be protected – pensions is the obvious one to think about. It will be a few years before we see the first of these SEPAs in operation - perhaps by then someone will have come up with a better acronym.
For more information please get in touch with Andrew Hubbard, or your usual RSM contact.