Choosing the right business structure

Sole Trader

This is the most simple business structure and the easiest to set up and administer. As a sole trader any decisions you make will be instant and any profits (after tax) belong to you to do with as you wish. However, on the flip side, the law makes no distinction between the business and its owner: liability is unlimited, meaning any business debt can be met from the owner’s personal wealth if the business fails.

As a sole trader, your profits will be subject to income tax and national insurance. This is fine if you are planning on keeping your business small. However once the business grows and the pre tax profits reach approximately £30,000 it may be better tax wise to operate through a limited company. You can view the current tax rates and use our 'Should I Incorporate' calculator by downloading our free app.

Partnerships

A partnership is for you if you are offering services with people you know well. Many building and domestic services firms are either sole traders or partnerships, but bear in mind that if you hope to gain sub-contract work from larger companies you may need to incorporate to satisfy their guidelines. Partnerships are a very common extension of the sole trader model, for example when two individuals or a husband and wife work together to build the business. The partnership is just as flexible, has the benefit of two or more heads, and the business won’t collapse if one of you is sick or needs a holiday.

There has to be an agreement as to how the liabilities, ownership and profits of the business are split and what happens if one partner wants to leave, which should be enshrined in a partnership agreement. However, the only legal requirement, as with a sole trader business, is that each partner is registered as self-employed and puts in a separate tax return.

In a standard partnership, as with sole traders, all partners are also responsible for all the debts owed by the business. This doesn’t only apply to debts you have incurred as a partner but to those of any partner, so you need to pay particular care to the conduct of the people you go into business with.

A partnership like this is ‘unlimited’, and as such is a very different animal from a limited liability partnership (LLP), which we look at below. But in both cases your share of the profit will be subject to income tax and national insurance.

Limited Companies

Once you register at Companies House as a private limited company you are letting yourself in for more administration. But it is not as daunting as it used to be – these days you can be the sole shareholder and director, and act as company secretary too (although appointing a company secretary is no longer a legal requirement).

Most private limited companies are owned by their shareholders and are limited by shares. This means that the face value of their share in the business is the most they can be called on to pay if things go wrong.

The great advantage of limited liability is that you can control your exposure to financial risk. There’s a firewall between your money and the company’s. This is because a limited company is a separate legal entity to the company directors, therefore it is the business itself that shoulders the financial liability if the business goes under. your home, your family and your lifestyle are protected.

The tax regime is more favourable to a registered company than to a sole trader.  Limited companies pay corporation tax on any profits earned. The directors are taxed on the salaries paid to them in the same way as employees and then the shareholders are taxed on any dividends paid to them.

Where the directors and shareholders are the same there is the opportunity to pay substantially less tax and national insurance. Our free app includes a 'Should I Incorporate' calculator that will show you how much can be saved by operating through a limited company.

Once you are trading, you will be required to submit full statutory accounts and a company tax return to HMRC each year, as well as making monthly or quarterly payments of employees’ income tax (PAYE) and NICs.

You will also have to file statutory accounts and an annual return to Companies House. 

Before you can start trading, you need to officially register your limited company, decide on the share structure, company officers and choose a name for your business. Then, once you’ve filed the correct documents with Companies House, you are ready to go. If this sounds like the right move for you please contact us and we can set up a limited company for you

Limited Liability Partnerships

LLPs may be seen as a hybrid between limited liability companies and traditional partnerships, in that they offer the limited liability available to limited company shareholders combined with the tax regime and flexibility available to partnerships. The number of partners is not limited but at least two have to be ‘designated members’ responsible for filing annual accounts.

Just as with a limited company the LLP model protects its members’ assets, limiting their liability to however much they have invested in the business and any personal guarantees they may have given when raising loans. But it doesn’t give you the same tax advantage.

As in an ordinary partnership, the members’ share of profit is taxed as income – each member has to register with HMRC as self-employed. LLPs also have to register at Companies House and there should be a members’ agreement stating what share of the profit each member should receive.

If you are thinking of setting up a business and would like some help please contact us