Choosing the right business structure

Choosing the right business structure

When you decide to set up a business, one of your first decisions should be selecting a business structure that is right for you. Getting it right from the outset is a lot easier than changing your mind 6 months down the line.

Getting it right from the outset is a lot easier than changing your mind 6 months down the line.

There are a number of entities you can choose from:

  • Limited
    – Company limited by guarantee
    – Company limited by share capital
    – Limited Liability partnership
  • Sole trader
  • Partnership

We will look at each of the above to help you select the one that best fits with your business goals and personal circumstances.

Limited

Limited liability means that the owners of a business only have to pay a certain amount should the business go wrong.  As a limited liability company is a separate legal entity to its shareholders and directors, you can not be held personally responsible for the company’s actions and your personal assets will not be under threat.

For companies limited by guarantee and for limited liability partnerships,  the amount that a member should contribute is agreed and put in the constitution. This is usually limited to £1 per member but can be more.

For companies limited by share capital the amount that a member should contribute equals the nominal value of the shares that they hold in the company

Sole trader

Sole traders are people who work for themselves but not through a company. As a sole trader you will not have limited liability which means any business debts become your debts, and your personal assets, including your house, will not be protected if your business gets into trouble. 

Partnership

If you want to work with someone else, or have more than one partner, then you will need to set up a partnership. You should have a partnership agreement to formalise the share of the profits for each partner and how much each partner will need to contribute should the business go wrong. Personal assets of the partners could be at risk if the business runs into problems.

Advantages and Disadvantages of each business structure

Sole traders/partnerships

Advantages Disadvantages
If you are just starting out, becoming a sole trader or forming a business partnership is a great option, as they are easy to set up and low cost. You will have fewer tax planning opportunities, as any profits earned are subject to income tax in the financial year in which they are made.
You will have fewer statutory filings to make each year. Your personal assets could be at risk as all the businesses liabilities and debts are considered to be yours.
Your accounts will be easier to prepare as no set format is required. Any profits you make will be taxable.
You are the business, so any profits you make (after tax and NICs) are yours to keep. You may find that some customers and suppliers won’t work with you as you aren’t a limited company.

 

Limited companies

Advantages Disadvatanges
You will come across as a credible, professional company, giving both suppliers and customers confidence to work with you. You will need to make more statutory filings a year. These include confirmation statement, statutory accounts and corporation tax return.
If things go wrong you are protected, which means your personal assets are not at risk. Statutory accounts must follow a specific format as set out in the Companies Act. You will probably need to hire an accountant.
You are likely to pay less personal tax than a sole trader, as you will only pay tax on the salary and/or dividends that you take from the company. Any profits are subject to Corporation Tax,  which is currently set at 20%.
You will have more opportunities for tax planning to reduce your tax liabilities. If you change your mind about running a business, you will have to go through a formal process to close the company.

 

Finding the right business structure to suit your individual circumstances is important and for many the advantages of a limited company will outweigh the potential benefits of operating as a sole trader.

If you would look to chat through these options in further detail, please get in touch.

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