Your business structure can affect how much tax you pay and how the law treats you. It’s worth considering all options before deciding.
The main structures are: Sole Traders, Partnership, Company and Limited Liability Partnerships (LLP)
Your choice will affect your admin burden, tax, legal status.
If you decide not to choose a structure, you will be classed as a Sole Trader, which is how many businesses start.
However, it’s worth weighing up all your option, so let’s uncover what’s available.
Sole Trader
A Sole trader is a single-owner business, but it doesn’t mean a single-worker business, you can hire staff, or sub-contractors to grow your business.
A sole trader is considered to be ‘self-employed’. This means you must register with HM Revenue & Customs (HMRC) for self-employment as soon as you start trading.
A sole trader is one person who is responsible for all a business, they are therefore entitled to all the risks and rewards this brings.
In the eyes of the law, the business and the owner are the same. This is called unlimited liability. The owner is personally liable for the firm’s debts and may have to pay for losses made by the business out of their own pocket.
Your income is declared on your self-assessment return and you will pay Income tax on this amount. You may also pay Class 2 and Class 4 National Insurance Contributions.
Advantages & Disadvantages
- Easy to set up.
- Full control over business decisions.
- You don’t have to file anything publicly (Companies have to file accounts and shareholder information with Companies House)
Partnership/Limited Liability Partnership
A Partnership/LLP is owned by two or more people. There are no rules about how the ownership must be determined, however, we would recommend a partnership agreement is considered when one is established.
You will need to register the partnership with HMRC and will be asked to complete a partnership tax return each year. The profits (and losses) from this will be split in line with the ownership structure, then declared on your Self-Assessment return to calculate your personal liability.
The ‘nominated partner’ is responsible for managing the partnership’s tax returns and record keeping. There are deadlines for filing accounts and your accountant will be able to help you with these.
Where the setup is an LLP, the liability will be restricted however filings will be required on companies house as with a company.
Advantages & Disadvantages
- It’s easy to set up as a partnership, although we recommend you have an official letter that sets out the agreement.
- You’re more likely to obtain a business loan when there’s more than one owner. Which allows for growth potential.
- Spread the risk with more members, financially and operational, for example, if someone gets ill.
- Unlimited liability – You are personally liable for all business debts therefore if the business gets into financial or legal trouble the partners do too!
- Each partner is responsible or liable for the other partner’s negligence or misconduct.
- Because of the shared responsibility, this can lead to disagreements and conflict over decisions. Conversely, the partners can understand and discuss important decisions.
Limited Company
A company is legally separate from its owner (or owners), which you’re less exposed to legal or financial issues. A company can be owned by one person or many, these are known as its shareholders.
A limited company is incorporated, which means they have their own legal identity and can sue or own assets in their own right. Their liability is limited to the total value of their assets and can’t be extended to its shareholders.
Advantages & Disadvantages
- Limited Liability restricts your potential losses to the amount you invest.
- Potential for tax planning opportunities, by restricting your income to the amounts needed, or averaging drawings from the company.
- More options to raise capital for growth and expansion. You can sell shares in your company to raise money
- Risk of disagreement between directors if going into business with someone else Can be complex to set up which results in higher start-up costs
- There’s a lot more admin involved, and you’ll have to regularly submit paperwork to Companies House
and finally…
You can change your business structure
You’re not locked into one structure forever.
A lot of businesses start as sole traders or partnerships and grow into companies or groups of companies.
You might change your business structure if you start getting bigger and doing more complex projects which carry a greater financial or legal risk for you. In preparation for the sale or expansion of your business, or simply to separate risk factors.