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.
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.
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.