When you start a new business, one of the
biggest considerations is how to structure it. Some businesses start out small
as a sole trader or partnership then, as they grow, they decide to incorporate
so that their personal liability is limited.
Here we take a look at the main options
available to you for structuring your business, and what is involved in each
one. Before we do however, just a note that it is always highly advisable to
discuss your business structure options with a financial professional. They
will be able to advise you on the most tax efficient method to use in your
particular situation.
Sole Trader
As a sole trader, the business is run in your
own name. This is the most straightforward structure when it comes to administration.
There is no need to register with Companies House, although you will need to
register with HMRC.
The disadvantage to being a sole trader is that
you are faced with unlimited liability. This means that if your business gets
into debt, then people to whom you owe money are within their rights to claim
on your personal assets, because you and the business are considered a single
entity.
Partnership
If you set up a business in partnership with one
or more others, this is known as a partnership and that is what you will be
considered even if you don’t formalise it. A partnership is the same as operating as a sole trader, but with
more than one person.
As with sole trader status, you won’t need to
register the business with Companies House and debtors of the partnership can
claim against the personal assets of any of the partners.
There is also the additional risk of exposure
to liability for the actions or omissions of fellow partners. This means that
you could be punished for mistakes made by a partner in the business, even if
you personally are not at fault.
Any business operating as a partnership must
have a formal partnership agreement. Without one, disputes are likely to arise,
and these will often prove very expensive. A partnership agreement should be
legally drafted. It sets out the individual responsibilities of the respective partners,
and how the profits and losses will be shared amongst them. The agreement will
also cover things such as what would happen in the event of the exit of one of
the partners.
Limited Liability Partnership (LLP)
An LLP is a popular choice for
partnership-based businesses that want to limit the personal liability of the
partners.
With an LLP, all partners are protected from
the risks associated with being a sole trader or partnership.
All LLPs must be registered at Companies House
and are required to submit financial accounts and a confirmation statement
every year. There is no shared capital, just interests, and the governing
principles are defined via a partnership agreement. An LLP is a separate entity
from the partners. This means all the partners are personally protected from
any legal or debtor action.
Concerning tax, each LLP member is taxed
through Self-Assessment as a self-employed individual.
Private Limited Company
A limited company tends to be the most popular
structure for most companies. Unlike an LLP, a limited company has
shareholders. This means that if the company makes a profit, the shareholders are
able to take advantage of dividends. This can prove beneficial when it comes to
tax and National Insurance contributions.
There are further tax incentives available to
limited companies that other types of business cannot take advantage of. These
include schemes to raise external investment.
With a limited company, the everyday running is
the responsibility of the board of directors which may be made up of a single
director or more than one. The Articles of sets out this structure and is put in place at
the time of forming the company prior to being filed with Companies House.
As a limited company you will need to make
annual returns to Companies House. You will be taxed under Corporation Tax and
may also be subject to Dividend Tax. You will also need to make returns under
Self-Assessment to cover the personal tax aspect of your earnings.
If you are unsure as to the best structure for
your business, your bookkeepers will be able to provide outline advice in the
first instance. For tax-specific advice, consult your accountant, and for legal
advice be sure to seek guidance from a specialist commercial lawyer.
